Regional banks have shelled out more and more to depositors to get them to stick around. For many, that still hasn’t been enough.
After an ugly third quarter, banks rolled out plans last week to try to shrink themselves back to health. Profits dropped by double digits from a year earlier at a number of them, including 44% at KeyCorp, 32% at Citizens Financial and 28% at Truist Financial.
KeyCorp said it would become a “smaller, simpler company.” PNC Financial disclosed that it would lay off thousands of employees. Truist, which sold its student loan portfolio this summer, said it would downsize other books with lower returns. Citizens recently said that it would exit the auto loan business and continue to scale back its mortgage business.
“When deposits are more dear and they’re more costly, then you say, well, I really don’t want to be funding that,” Citizens Chief Executive Officer Bruce Van Saun told The Wall Street Journal.
Investors are getting nervous. Citizens shares slid nearly 6% on Wednesday after it reported earnings, and U.S. Bancorp shares were down more than 4%. Shares of Zions Bancorp sank almost 10% on Thursday. Regions Financial slid more than 12% on Friday.
Megabanks have also had to pay more for deposits, but so far it hasn’t been nearly as painful for them. JPMorgan Chase, Bank of America, Wells Fargo and Citigroup collectively earned about $30 billion in the third quarter, a 27% increase from a year earlier. They have the cushion of big operations in businesses such as trading, investment banking and wealth management.
The Federal Reserve has raised interest rates 11 times since last year in an attempt to curb inflation. Higher rates are usually a boon for banks since they can charge more for loans. But the pace of the rate increases, the fastest in decades, has made it more expensive than expected for banks to get and keep deposits. High rates also drove down the value of bonds that banks bought when rates were low.
“Bank balance sheets weren’t built for that,” said Tom Michaud, chief executive at Keefe, Bruyette & Woods, a unit of the investment bank Stifel Financial. Banks will “have to have a franchise that can operate in this environment,” he said, “and if they don’t, they’re likely to find a partner.”
Some of the smaller ones are already merging. There were 34 bank deals announced in the third quarter, according to S&P Global Market Intelligence, with a collective value of nearly $3 billion. The value of bank deals announced in the first and second quarters combined was about $630 million.
The banks say it could be worse. They are still making money, just much less of it. Many said their deposit levels were more stable in the third quarter, at least compared with the chaotic first quarter when a string of bank failures led many customers to flee for the perceived safety of the megabanks.
Banks paid peanuts for deposits for a long time, including in recent years when customers had tons of extra cash from the pandemic. Now they have to compete with Treasurys and other investments that can yield 5%, or else find other ways to fund themselves.
The average rate many of the big regional banks paid on deposits rose to around 2% or higher in the third quarter, from next to nothing a year earlier. Some have had to lean on even more costly alternatives, such as deposits brokered through a third party or loans from the Fed or the Federal Home Loan Bank system.
Interest expenses jumped roughly 300% from a year earlier at U.S. Bank, PNC, Truist and KeyCorp.
Americans continue to spend, borrow and pay back loans. But there are signs of potential trouble ahead. Consumers are still strained by high costs. A surge in interest rates has priced many out of the market for homes and cars. Lower-income households have spent much of what they were able to save during the pandemic.
“If you look underneath the aggregate, that suggests not all U.S. consumers are as healthy as they appear,” said Tim Spence, CEO of Fifth Third Bancorp. “I am still worried.”
Consumer books aren’t the only concern. Regional banks hold large concentrations of commercial real estate, including office buildings that have come under pressure since the pandemic.
M&T Bank said net charge-offs rose by more than 50% to $96 million in the third quarter, driven by three large office buildings in Washington, D.C., Boston and Connecticut and a healthcare provider with multiple properties in New York state and Pennsylvania. The bank said it could charge off more from that portfolio in the fourth quarter.
“I don’t think the full effect of all the rate increases is in the economy yet,” M&T Chief Financial Officer Daryl Bible said. “So there could be a little bit more stress.”
Write to Gina Heeb at gina.heeb@wsj.com