US Banks Report Plunge in Fourth-Quarter Profits Amidst Higher

Several U.S. banks disclosed a substantial decline in fourth-quarter profits on Thursday, attributing the downturn to reduced interest income and charges associated with replenishing a deposit insurance fund. This setback comes amidst a broader industry-wide contraction in net interest margins, exacerbated by increased payouts on deposits aimed at retaining customers.

The Federal Reserve’s recent hike in rate had a positive impact on banks, benefiting banks at a certain level. However, the strategy of offering higher payouts on deposits is to prevent customers, who want alternative high-yielding options. It has taken a toll on net interest margins aiming the possibility of further rate cuts by the Fed this year. With this, banks are bracing for additional pressure on margins, exacerbating the challenges they already face.

In addition to grappling with diminished interest income, several U.S. banks are also having issues with their finances, with the burden of replenishing the Federal Deposit Insurance Corporation (FDIC) insurance fund. It also works as a safe net providing security to customers.

Amidst these challenges, another regulatory hurdle emerged on Thursday, as a top regulator announced plans for new short-term liquidity rules aimed at helping lenders respond to bank runs, akin to those that led to the collapse of three banks last year.

KeyCorp (NYSE:KEY), for instance, reported a staggering nearly 92% plunge in quarterly profit and forecasted a 2%-5% decline in its net interest income (NII) for 2024. CEO Chris Gorman cited muted borrower appetite, with total loans at the end of the quarter nearly 3.2% lower than the previous year.

Investors, concerned about deposit cost trends, are closely observing the banking sectors and their financial report this quarter. Analysts fear that increased deposit cost can be a drop in earnings per share for 11 U.S. regional banks compared to the previous year.

The financial strain in the sector was quite visible, especially with Truist and M&T Bank (NYSE:MTB) with a significant profit decline. Notably, Northern Trust (NASDAQ: NTRS) witnessed a downfall of a 27% decrease in profit. Moreover, there is the discovery of financial, specializing in digital banking and payments services, with a substantial 62% drop in profit due to larger provisions for potentially sour loans.

Despite the challenges, some analysts remain optimistic about the outlook for regional banks in 2024. Goldman Sachs banking analyst Ryan Nash noted that regional banks are well-positioned for the year ahead, suggesting that the trough in net interest income may occur by the middle of the year.

The news of diminished profits weighed on the S&P 500 financials sector index, which dipped by 0.3%, reflecting investor concerns about the sector’s performance amidst ongoing challenges.