US Regional Banks Struggle with Earnings Amid Bank Run Fallout

US Regional Banks Compete on Deposit Rates
Funding Costs Rise, Earnings Deteriorate
Deposits Shift to CDs, Increasing Interest Expenses

Although the global banking crisis triggered by Silicon Valley Bank (SVB) seems to be settling down, regional banks in the United States have suffered severe damage to their earnings due to this crisis. Analysts suggest that as U.S. banks have introduced aggressive measures to prevent deposit bank runs and customer attrition, their earnings stability is wavering.

On the 20th, major foreign media reported that among the medium-sized U.S. banks that announced their earnings this week, more than 12 are expected to see a decline in profits due to the negative impact stemming from SVB. As the banking crisis spread across the financial sector, bank runs occurred, prompting banks to competitively raise deposit interest rates to retain customers, which is expected to significantly reduce net interest margins.

Net interest margin refers to the amount earned by financial institutions from managing assets minus the cost of funds such as deposit interest. It is primarily used as an indicator of a financial institution's profitability.

[Image source=Reuters Yonhap News]

Mike McQuary, Chief Financial Officer (CFO) of Truist Financial, headquartered in Charlotte, North Carolina, explained, "(Along with the increase in deposit interest rates) funding costs have also risen, significantly lowering the outlook for net interest income this year." Zions Bancorporation, once considered a prime U.S. bank holding company, also revised downward its net interest margin forecast for this year.

The reason U.S. regional banks have fiercely competed in raising deposit interest rates is due to the wave of customers withdrawing deposits following the bank failure crisis that began with SVB. According to statistics from the U.S. Federal Reserve (Fed), U.S. bank customers withdrew $600 billion in deposits in the first quarter.

This phenomenon was more concentrated in some regional banks. For example, EagleBank, a regional bank in Bethesda, Maryland, saw withdrawals amounting to 14% of its total deposits this quarter.

In contrast, the deposit outflows from the four major U.S. banks?JP Morgan Chase, Wells Fargo, Bank of America, and Citigroup?were less than 10% of their total deposits. These four banks account for 45% of total bank deposits.

[Image source=Yonhap News]

In this situation, some banks also faced difficulties as time deposit customers moved their funds to certificates of deposit (CDs) seeking higher yields, leading to a decrease in deposit balances. Fifth Third Bank, Huntington Bancshares, and KeyBank in New York, each holding assets of $200 billion, saw their time deposit balances fall below 3% in the third quarter as customers shifted deposits to CDs. CDs are excluded from deposit insurance coverage and do not pay deposit insurance premiums, so they offer slightly higher interest rates than regular deposits.

Major foreign media explained, "Given this trend, banks that maintained their deposit balances likely raised deposit interest rates to prevent customer withdrawals," adding, "Rather than worrying about their ability to pay back customers' money, banks may face difficulties related to profitability."