The stocks of Comerica (CMA), Zions (ZION) and KeyCorp (KEY) fell after they disclosed billions in deposit outflows or set aside more for loan losses during the first quarter, dampening a nascent rally in regional bank stocks.
The pullback came a day after investors cheered an update from another regional bank at the center of last month’s market chaos, Western Alliance (WAL). The Phoenix lender said it attracted $2 billion in new deposits since the end of the first quarter, and a 24% stock surge on Wednesday lifted other troubled regional lenders such as First Republic (FRC) and PacWest (PACW).
But that bump was short lived. Today Western Alliance, First Republic and PacWest are all down as investors digest new results from six sizable regional lenders, including Truist (TFC), Fifth Third (FITB) and Huntington Bancshares (HBAN).
Stocks of Truist, Comerica, KeyBank and Zions also fell between 3-5% as of 12 PM ET. Stocks of Fifth Third and Huntington were down by more than 1% and 2%.
The new results reinforced the many challenges facing regional banks, which operate in local markets across the US and lack the pricing power or diversity of giants such as JPMorgan Chase (JPM) or Bank of America (BAC).
Most did lose deposits during the first quarter of the year as customers sought higher yields or fled to the safety of larger institutions. At Comerica, deposits fell 9% and at Zions they were down 3.4%.
Wedbush analysts said in a research note that deposit outflows for Zions, which is based in Salt Lake City, “were higher than expected,” but “the company indicated that deposit balances have remained relatively stable thus far” in the second quarter.
Many of these smaller banks also disclosed that they are starting to pay more to keep existing depositors or attract new customers. Zions said its costs for total deposits more than doubled from the previous quarter, an increase of 44 basis points, while Charlotte-based Truist said its deposit costs are up 46 basis points from last quarter.
“The battle for retail deposits continues to be very competitive,” said Fifth Third CFO Jamie Leonard.
That deposit pressure, in turn, is cutting into a key measure of profitability known as net interest income, which is the difference between what a bank earns on its loans and pays out on its deposits. Such income is down from the fourth quarter of 2022 for most of these institutions. For Zions, net interest income was down 28% while at Key it was down 10% as compared to the previous quarter. Key is based in Cleveland.
Many regional lenders said these numbers will drop again in the second quarter as deposit costs remain elevated and the Federal Reserve keeps interest rates high.
Comerica, a Dallas-based institution that lost nearly $7 billion in deposits during the first quarter, said its net interest income is expected to drop 11-13% in the three months ending June 30 before stabilizing and improving in the second half of the year.
Comerica executives said they expect some of the deposits they lost to come back. Much of the outflows in March, they said, happened because long standing customers decided to move some excess amounts elsewhere. Because those relationships are strong, the customers may return some of their money.
“I don’t think we are going to have to pay up for it,” senior executive vice president Peter Sefzik told analysts Thursday.
Another challenge for some of these regional banks is that many are also increasing their loan loss allowances as economic conditions worsen, meaning they anticipate more loans to go bad.
But many are not yet making fewer loans, as some investors feared. Total loans rose at Zions, Truist, Fifth Third, Key and Comerica.
Click here for the latest stock market news and in-depth analysis, including events that move stocks
Read the latest financial and business news from Yahoo Finance