US mid-sized bank shares slump after downbeat interest income forecasts

By Jaiveer Shekhawat and Niket Nishant

(Reuters) -Shares of mid-sized U.S. banks fell on Friday after a string of earnings reports heightened investor concerns that the boost to lenders from the Federal Reserve’s interest rate hikes was tapering off.

Regions Financial (NYSE:) shares plummeted over 12% to $14.44 after missing profit estimates, when an industry crisis began following an outflow of deposits that engulfed three banks.

The lender said it expects net interest income (NII) in the fourth quarter to decline about 5% from current levels.

“We see the entire bank group as inexpensive but, on a relative basis, we would rather invest elsewhere,” Wells Fargo analyst Mike Mayo said about Regions Financial. The headwinds from higher rates could last longer than expected, Mayo added.

Regions Financial reported profit of 49 cents per share for the third quarter, missing analysts’ average estimate of 58 cents, according to LSEG data.

The lender also missed its estimates on net interest income, credit costs and expenses while share of bad loans increased at a faster pace than expected, R. Scott Siefers, an analyst at Piper Sandler said in a note.

The U.S. regional banks have been grappling with tepid performance after the collapse of three lenders in spring this year which sparked deposit outflows leading to earnings being under pressure since then.

UNDERWHELMING MARGIN TALK

A busy earnings week for banks has highlighted that the Fed’s rate hikes forced several of them to pay higher interest on deposits to stem the migration of customers to alternatives such as money-market funds.

That, together with an expected slowdown in loan demand as borrowing costs increase, dampened expectations of NII growth in the fourth quarter.

“The higher for longer environment will continue to pressure net interest margins and overall profitability, as well as the risk of certain borrowers who are unable to repay,” said Terry McEvoy, banking analyst at Stephens.

Huntington Bancshares (NASDAQ:)’ stock dipped 3.88%, while Comerica (NYSE:) dropped 8.5%, dragging down the Banks index by over 2%.

The KBW Regional Banking index also fell by over 3.50%.

Lenders such as Fifth Third Bancorp (NASDAQ:) and Comerica have also forecast a drop in NII.

Huntington Bancshares posted an 8% drop in third-quarter profit as interest income declined. While its margins and net interest income are expected to improve throughout 2024, its expenses are also expected to pick up which could weigh on its performance, analysts said.