Regional Banks Join Net Interest Income Rebound Celebration

Regional banks have begun to turn the corner on net interest income (NII) in the second quarter, signaling a potential recovery after a prolonged period of decline. PNC Financial Services Group Inc. and M&T Bank Corp. both reported their first increases in NII since 2022. Meanwhile, US Bancorp ended a streak of four consecutive quarterly declines. The banks attributed this improvement to factors such as deposit growth, loan repricing, and balance-sheet optimization—essentially better management of assets and liabilities. For instance, M&T’s NII saw an uptick by shifting a large portion of cash into securities.

US Lenders Hit NII Trough

Recent results from a selection of midsize banks, combined with insights from major institutions like Bank of America Corp., suggest that US lenders might have reached the low point for NII. The metric measures the difference between what banks earn on assets and what they pay on liabilities. It had significantly dropped in the first quarter. Rising interest rates had dampened loan demand and increased deposit costs. Net interest income (NII) is particularly vital for regional banks. Unlike larger financial institutions, regional banks do not have extensive trading and sales operations.

Bloomberg Intelligence analyst Herman Chan commented, “We’re seeing or have reached the trough in both net interest margins and net interest income. Many banks have talked about improving margins due to the repricing of fixed-rate assets, including loans and securities.”

KeyCorp and Citizens Financial Project Gains

KeyCorp anticipates a favorable impact from short-term swaps, treasuries, and other maturing assets. The company expects this to boost net interest income (NII) by at least $120 million in the fourth quarter. This would represent a more than 13% increase from the second quarter’s results, according to CEO Chris Gorman. PNC’s CEO William Demchak also expressed confidence, stating that the bank is on track to achieve record NII by 2025.

Canada Inflation Slows, Opening Door for Potential Rate Cuts

Canada Inflation Slows again, providing the Bank of Canada with an opportunity to reduce interest rates next week.

Citizens Financial Group Inc. expects a rebound in the fourth quarter, despite forecasting a decrease in the next quarter due to a final rise in swap costs. CFO John F. Woods also projected two interest rate cuts from the Federal Reserve by year-end to spur lending and client activity.

Commercial Real Estate Remains a Concern

Despite the positive outlook for NII, commercial real estate (CRE) continues to exert pressure on bank results. A downturn in office occupancy, driven by remote work, has led to increased charge-offs in CRE. At PNC, office-related CRE charge-offs rose by approximately 22% year-over-year, while US Bancorp saw a 38% increase. M&T reported an 8% rise in overall loan losses as it reduced its CRE portfolio. CFO Daryl Bible remarked, “We’ve made significant progress and are getting close to stabilizing. We hope to reach those levels in the next quarter or two.”

Investor Sentiment Improves

The recovery in NII and positive forecasts have bolstered investor sentiment in the banking sector. The KBW Regional Banking Index began the week with its strongest three-day performance since January 2021. This reflects growing confidence among investors, despite ongoing challenges in commercial real estate.

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