Federal Reserve Chair Jay Powell is making the rest of 2024 more complicated for regional banks.
This past week 12 of the nation’s best-known midsize lenders reported sizable drops in first quarter profits thanks largely to the effect elevated interest rates are having on their operations.
“The outlook for potential rate cuts in 2024 has meaningfully changed,” Andy Cecere, US Bancorp CEO, told analysts Wednesday. “We now expect our net interest income for the full year to be lower than anticipated.”
Many of these banks are paying higher costs for deposits as customers continue to seek out higher yields, and those costs are eating into a key revenue source known as net interest income.
That pressure is not likely to abate anytime soon as the Fed dials back its expectations for rate cuts in 2024, a move that was cemented by Powell this past Tuesday just as many regional banks prepared to release their first quarter results.
The Fed was a popular topic for regional bank executives as they explained their results to Wall Street and described their outlook for the rest of the year.
“It would be a bit of a heroic assumption for anybody to say that deposit costs won’t continue to creep up in the face of a steady Fed,” PNC CEO Bill Demchak told analysts Tuesday.
Most reaffirmed that they expect the money they make from lending to drop as rates remain elevated.
“When you read those [CPI] reports, it’s a little bit like you’re looking into Snow White’s magic mirror; you kind of see what you want to see,” Fifth Third Bancorp (FITB) CEO Timothy Spence said in an interview Friday.
Some, however, predicted that if rates stay high, their banks will eventually be able to make more from lending or the repricing of their securities, perhaps during the second half of this year.
“For all banks in an environment like this one, your ability to continue to control interest expense is going to be a big driver of your ability to hit your outlook,” Spence said.
Take US Bancorp (USB) and PNC Financial Services Group (PNC), the two biggest regional lenders in the US.
Minneapolis-based US Bancorp now expects to make between $200 million and $500 million less in net interest income than it forecast in January, driven by lower loan growth and more expense pressure from deposit costs.
As for next year, “we’re not going to give a 2025 guide right now because it’s so volatile in terms of what rates could be.”
Pittsburgh-based PNC, however, said it expects improvement in the last two quarters of the year thanks to the repricing of its under-earning securities portfolio. That will help even out any rise in deposit costs, the bank’s CEO said.
“Obviously, we could outperform, but I’d much rather under promise and over deliver right now,” M&T CFO Daryl Bible told analysts Monday.
