Banking Crisis Does Little To Derail Q1 Regional Bank Earnings

Yearly comparison, deposit challenges likely to crimp profits moving forward

Downtown Boise Financial District Skyscrapers and the State Capital Building. Zions Bank and Wells Fargo towers on a summer afternoon.

StellaMc / Getty Images

Regional and mid-sized banks such as Zions Bancorp (ZION), Keycorp (KEY), and Fifth Third Bancorp (FITB) are likely to post historic net interest income (NII) growth in the first quarter thanks to the Federal Reserve's interest rate hikes, but the boost could be short-lived as competition to retain deposits begins to hurt bottom lines.

These banks, along with East West Bancorp (EWBC), Comerica, Inc. (CMA), and Western Alliance (WAL), will release quarterly financial results this week, just a month after concern about unrealized balance sheet losses wreaked havoc in financial markets.

Despite that upheaval, four of the six are expected to report double-digit growth in quarterly profits, according to estimates compiled by Visible Alpha. Driving those increases: net interest income gains ranging from 11% to 53%. Of the six banks, only Western Alliance averaged net interest growth of over 10% before 2022.

But even lenders who avoided the bulk of last month's banking system turmoil, which caused the S&P Banks Select Industry Index to fall 18.8%, may not enjoy their good fortune much longer.

Net interest income is forecast to slow substantially in coming quarters as the Federal Reserve slows—and possibly stops—its interest rate hikes. At the same time, banks likely will face more pressure to pay higher rates on the deposits that fund their operations.

Key Q1 2023 Projections for Regional and Mid-Sized Banks
 Bank Earnings Growth (%) Adjusted EPS ($) Net Deposit Growth (%) Net Interest Income Growth (%)
Zions Bancorp  15.6 1.52 -12.2%  24.1%
Keycorp  -5 0.43 4.5%  11.4%
East West  32.9 2.20 18.3%  44.8%
Comerica  65.2 2.31 -10.8%  53.5%
Western Alliance  -31.5 1.49 15.1%  31.2%
Fifth Third  14.6 0.79 -0.1%  28.8%
Source: Visible Alpha

Halycon Days for Interest Income Ending

The Fed began raising interest rates from historic lows in the first quarter of 2022. By and large, banks managed to raise rates on the loans they made more than the rates they paid to depositors.

However, most analysts and investors expect the Fed will halt its rate-hike campaign in the coming months. Even if that proves too optimistic, the generous quarterly comparisons that aided net interest income growth in the past few quarters will likely end soon.

On a year-over-year basis, net interest income growth at the six banks is forecast to fall to a range of 1% to 28% in the second quarter. In the third quarter, four of the six are expected to post a net interest income decline. And by the fourth quarter, five of the six likely will see net interest income fall anywhere between 6% and 12%, with only East West Bancorp expected to report a slight increase.

Dwindling Deposits

Meanwhile, last month's turmoil initiated the biggest U.S. bank deposit drawdown in decades. That may force banks to raise deposit rates so they can keep funding their operations, exacerbating the gloomy expectations for net interest income.

Interest-bearing deposits—the funding backbone used to make revenue-producing loans—at these six banks likely grew a median of just 2.2% in the first quarter compared with the same quarter a year ago. Three of the six saw deposits shrink.

That's down from median growth of 5.1% at the same banks in last year's first quarter when 12-month certificates of deposit (CDs) paid an average rate of 0.14%.

This year, deposit growth declined even though 12-month CDs paid an average of 1.49% interest at the end of the first quarter.

The challenge of retaining deposits leaves traditional banks little choice but to raise the rates they pay customers to park their money.

"We expect ongoing deposit losses, though at a significantly lower pace than seen over the last month," Goldman Sachs said in a research report last week, noting that the Fed's recently installed program to aid bank funding should maintain sufficient liquidity in the banking system. "The reallocation of liquidity, however, will likely occur at a higher funding cost."

Concerns around liquidity, percent of uninsured deposits and exposure to commercial real estate loans have battered stocks of regional and mid-sized banks. Western Alliance, Zions and Comerica have seen their share prices decline in excess of 30% year to date.

regionla bank share prices YTD


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  1. "Traders raise their expectations for a Fed pause through at least June, with rate cut almost certain by year-end."

  2. Federal Reserve. "National Deposit Rates: 12-Month CD."

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