Analysts expect rate hikes to boost regional banks' Q3'22 earnings

U.S. regional banks are expected to report strong results for the third quarter.

Regional banks — depository institutions with between $10 billion and $100 billion in assets — start reporting third-quarter earnings on Oct. 17. Of the 67 publicly traded regional banks with at least five GAAP EPS estimates from analysts, consensus estimates forecast a linked-quarter EPS decline for just five companies and no change for one, according to S&P Global Market Intelligence data.

Net interest margins have been expanding with the Federal Reserve raising the federal funds rate, analysts noted. The net interest margin for the median midcap bank stood at 3.24% in the second quarter and is projected to rise to 3.35% for the third quarter, Christopher Marinac, director of research at Janney Montgomery Scott, said in an interview.

"Accelerating Fed actions provide a disproportionate advantage to banks with the best deposit franchises, as they can keep deposit costs and balances more stable, extending asset sensitivity benefits into 2023 and beyond," Wells Fargo analysts wrote in an Oct. 6 note.

A challenge for banks is that higher interest rates have weighed on values of many bonds they own. The vast majority of banks' securities reside in available-for-sale portfolios, which must be marked to market on a quarterly basis. And while the changes in those values do not represent a hit to earnings, they are captured in accumulated other comprehensive income, which impacts tangible book value, Marinac said.

Banks with $50B-$100B in assets

Most banks in the $50 billion to $100 billion asset range are expected to exceed the previous quarter's and year-ago earnings. Exceptions include New York Community Bancorp Inc., which is involved in a pending M&A deal, and Popular Inc.

Banks with $20B-$50B in assets

Nearly all banks in the $20 billion to $50 billion asset range are also expected to exceed the previous quarter's and year-ago earnings, except for UMB Financial Corp. which analysts predict will report earnings down from last quarter. A few more are expected to disappoint compared with the year-ago quarter.

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Banks with $10B-$20B in assets

Most banks in the $10 billion to $20 billion asset range are also expected to exceed the previous quarter's and year-ago earnings, though analysts anticipate that First Financial Bankshares Inc.'s and First Foundation Inc.'s earnings will fall sequentially and NBT Bancorp Inc.'s will be unchanged. A few more are expected to disappoint compared with last year.

Uncertain environment

M&A activity year-to-date is down from the first three quarters in 2021, and sellers seem to have prices in mind that "buyers cannot match in the current market conditions," analysts at PNC Financial Services Group Inc. wrote in an Oct. 7 note. Buyers are also more reluctant to take on acquired loan books as the economy slows, although most banks "are still expressing asset quality optimism," they added.

While bank share prices suffered during the third quarter as a result of hawkish Fed comments and a growing sense that a recession is inevitable or has already arrived, "anecdotal evidence suggests banks are experiencing little deterioration in credit quality," the PNC team added.

D.A. Davidson Cos. analysts said credit appears benign as of the third quarter, but their leading indicator for credit is "flashing yellow," since the Federal Reserve's senior loan officer survey in July showed banks tightening underwriting terms.

"History has shown when banks go from easing underwriting standards to tightening, the bank group starts to enter the next phase of a credit cycle as net charge-offs begin to increase," the analysts wrote.