Profit risks for 10 large regional banks: How a reversal of pandemic deposit trends could cut earnings
By Philip van Doorn
A lower supply of cheap cash could lead to profit declines up to 40% for large regional banks in one scenario, according to Keefe, Bruyette & Woods
The worst may be over for U.S. banks, with liquidity fears that led to the recent failures of three regional institutions subsiding, but banks also face a longer-term challenge -- a reversal of the flow of cash into noninterest-bearing transaction accounts during years of government and Federal-Reserve stimulus before and during the COVID-19 pandemic.
This headwind doesn't threaten banks' existence -- it threatens their profits.
David Konrad, managing director of equity research at Keefe, Bruyette & Woods provided two sets of earnings estimates for 10 large regional U.S. banks, based on the firm's expectations that deposit mixes will revert to 2019 levels, and another "what if" scenario.
Bankers love checking accounts. They typically pay no interest on the cash and can draw fee income in various ways while processing checks and handing high volumes of other transactions for corporate clients. During the long period of the Fed's quantitative easing, including a vast increase in the U.S. money supply as the central bank purchased trillions of dollars of bonds, prices of most risk assets (such as stocks, bonds and real estate) increased. All together, this helped lead to a spike in demand deposits.
Here are totals for noninterest-bearing deposits (NIBD) for the 10 banks KBW looked at as of March 31 and looking back four years. The banks are sorted alphabetically and all of the numbers are in billions:
Bank City Total assets March 2023 NIBD March 2022 NIBD March 2021 NIBD March 2020 NIBD March 2019 NIBD Citizens Financial Group Inc. Providence, R.I. $222 $44.3 $50.1 $46.1 $32.4 $28.4 Fifth Third Bancorp Cincinnati $209 $49.6 $65.6 $61.4 $39.5 $36.0 Huntington Bancshares Inc. Columbus, Ohio $189 $36.8 $43.8 $31.2 $21.0 $20.0 KeyCorp Cleveland $198 $37.3 $50.4 $47.5 $29.3 $28.0 M&T Bank Corp. Buffalo, N.Y. $203 $60.0 $58.5 $53.6 $35.6 $30.0 PNC Financial Services Group Inc. Pittsburgh $562 $118.0 $119.0 $120.6 $81.6 $71.6 Regions Financial Corp. Birmingham, Ala. $154 $49.6 $59.6 $55.9 $37.1 $35.5 Truist Financial Corp. Charlotte, N.C. $574 $128.7 $150.4 $136.6 $97.6 $53.0 U.S. Bancorp Minneapolis $682 $124.6 $129.8 $126.8 $91.4 $74.6 Wells Fargo & Co. San Francisco $1,886 $434.9 $530.0 $494.1 $379.7 $341.4 Source: FactSet, based on SEC filings.
Based on the numbers above, here are year-over-year changes for the group's noninterest-bearing deposits over the past four years through March 31:
Bank March 2023 change in NIBD from year earlier March 2022 change in NIBD from year earlier March 2021 change in NIBD from year earlier March 2020 change in NIBD from year earlier Citizens Financial Group Inc. -11.5% 8.8% 42.2% 14.1% Fifth Third Bancorp -24.3% 6.9% 55.2% 9.9% Huntington Bancshares Inc. -16.1% 40.3% 48.4% 5.0% KeyCorp -26.0% 6.1% 62.3% 4.7% M&T Bank Corp. 2.5% 9.1% 50.9% 18.6% PNC Financial Services Group Inc. -0.9% -1.3% 47.8% 14.0% Regions Financial Corp. -16.7% 6.6% 50.6% 4.7% Truist Financial Corp. -14.4% 10.2% 39.9% 84.1% U.S. Bancorp -4.0% 2.4% 38.6% 22.6% Wells Fargo & Co. -17.9% 7.3% 30.1% 11.2%
For Truist Financial Corp. (TFC), the 84% increase in March 2020 NIDB from a year earlier reflected the old BB&T's acquisition of SunTrust of Atlanta to form Truist.
The growth numbers were solid even in March 2020, just when the COVID pandemic was beginning to disrupt the U.S. economy, and for the most part continued through March 2022, which is when the Fed began to raise the federal-funds rate and gear up to reduce its bond holdings. The numbers for the first quarter of 2023 speak for themselves.
A decline in noninterest-bearing deposits and possible outflow of other deposits as savers seek higher yields tempered banks' advantages from rising interest income on new or adjustable loans as interest rates rose over the past year. A bank's net interest margin (NIM) is its average yield on loans and securities investments less its average cost for deposits and wholesale borrowings. But NIM isn't a GAAP calculation; banks don't use a uniform method to calculate it.
So here are FactSet's calculations for the group's net yields on average earning assets for the first quarter and previous four quarters:
Bank Q1 2023 net yield Q4 2022 net yield Q3 2022 net yield Q2 2022 net yield Q1 2022 net yield Citizens Financial Group Inc. 3.67% 3.21% 3.10% 2.79% 2.84% Fifth Third Bancorp 3.14% 2.98% 2.81% 2.66% 2.53% Huntington Bancshares Inc. 3.41% 3.30% 3.14% 3.03% 3.18% KeyCorp 2.69% 2.66% 2.52% 2.48% 2.53% M&T Bank Corp. 4.23% 3.62% 3.13% 2.64% 2.75% PNC Financial Services Group Inc. 2.80% 2.89% 2.64% 2.55% 2.69% Regions Financial Corp. 4.15% 3.82% 3.67% 3.41% 3.36% Truist Financial Corp. 3.09% 3.01% 2.88% 2.80% 2.78% U.S. Bancorp 3.12% 2.81% 2.84% 2.69% 2.65% Wells Fargo & Co. 2.93% 2.57% 2.32% 2.15% 2.03% Source: FactSet
Most of the first-quarter net yields were much higher than those a year earlier. A few figures in the table are bolded, to highlight that KeyCorp (KEY) and PNC Financial Services Group Inc. (PNC) showed the least improvement in net yields from a year earlier and that PNC was the only one to show a sequential narrowing of its net yield during the first quarter.
Konrad wrote: "We currently expect noninterest-bearing deposits to shrink [as a] percentage of total deposits to pre-COVID levels (2019)." But he acknowledged that this "may not be the best baseline" because interest rates in 2019 were lower than they are today and because "it has never been easier for customers to move money."
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