Fed's September rate cut to have limited effect on regional banks' Q3 earnings

The Federal Reserve's recent 50-basis-point rate cut and deteriorating credit quality in certain areas will likely be themes as US regional banks report third-quarter earnings.

A little more than one-third, or 26 of 68, regional banks are expected to report higher earnings sequentially, according to an S&P Global Market Intelligence analysis of US public banks with total assets between $10 billion and $100 billion and normalized earnings per share (EPS) estimates from at least five analysts. There are 35 expected to post lower EPS quarter over quarter, while seven are estimated to report no change. The first banks in this asset range will report third-quarter earnings on Oct. 15.

Net interest margin (NIM) "stability/inflection and 4Q outlooks will likely be the primary source of attention, particularly with the late quarter Fed rate hike and potential for further cuts this year," Brandon King of Truist Securities wrote in an equity research report on Oct. 1. "We expect 2024 [net interest income (NII)]/NIM outlooks to remain relatively intact as [near] term deposit betas are likely to be higher for the first few Fed rate cuts, helped by sluggish loan growth."

Analysts at Piper Sandler anticipated "more stable" NIMs as well as slow loan growth.

"We do not expect major downside revisions, but commentary from last quarter suggested slower loan growth and a more stable NIM in 3Q before rate cuts start to take impact," the Piper Sandler analysts wrote in an industry note on Sept. 23.

Rate cut impacts could vary depending on each bank's concentration areas, such as commercial real estate (CRE).

"The outlook, on balance, is likely to be more optimistic as rate cuts and lower intermediate rates support a better credit outlook for banks (especially CRE), and should support future opportunities for loan growth," Raymond James & Associates analysts wrote on Oct. 2. "Greater expectations for a positive slope across the entire yield curve bode well for both bank profitability and valuations. That said, there will be some crosswinds as [commercial and industrial (C&I)] heavy banks are likely to face NIM pressure from FOMC rate cuts."

Credit quality

Asset and credit quality is expected to continue worsening in CRE, including office, and C&I.

"We believe asset quality will likely continue to slightly deteriorate in 3Q24 with increases in watch list credits and [net charge-offs] driven by idiosyncratic credits in C&I and office CRE," King of Truist Securities wrote in the equity research report. "Lower interest rates should alleviate stressed borrowers and reduce the tail risk from CRE maturities over the next year, in our view. We still expect continued stress in Office CRE loans, some leveraged loans, and borrowers more exposed to lower wage consumers."

Deposit costs

Deposit costs are expected to improve with the change in the Fed rate cycle.

"Down rate beta commentary has been mixed for our bank group, but most banks agree that deposit costs have peaked and should now be on the decline," Wedbush Securities analysts wrote in a note on Sept. 25.

Whether banks are liability-sensitive could also make a difference for their results. Liability-sensitive banks are likely to outperform, while asset-sensitive banks might be impacted negatively by variable rate assets' low short-term rates, they added.

"Expect 3Q results to be mixed, but the lower rate environment could result in positive management commentary and guidance revisions, especially for liability sensitive banks," the Wedbush Securities analysts wrote. "We anticipate that the benefits from a lower rate environment should become more apparent for banks in coming quarters, but in the near term, we expect another quarter of mixed results in 3Q."

Overall, they saw the new operating environment that banks are entering as positive.

"We anticipate that banks should be in a stronger position to pivot to a more offensive posture, as lower short term rates and a more normalized yield curve should make for a more ideal operating environment on multiple fronts," the analysts also wrote.

EPS estimates

Of the 13 banks with between $50 billion and $100 billion in assets, five are anticipated to report higher EPS quarter over quarter. Seven are expected to report lower EPS compared to the linked quarter, and one is not expected to report any change.

Within this group, Comerica Inc., Western Alliance Bancorp. and Wintrust Financial Corp. were among Wedbush Securities' "top picks." Columbia Banking System Inc. was among the banks Wedbush upgraded. Truist Securities' King also highlighted Wintrust, saying it is among the banks with the highest sequential growth forecasts for NII, and Piper Sandler said in an Oct. 3 note that Comerica "seems the clear favorite."

However, King expects Comerica as well as Columbia Banking System to see NII compression. Bank of America downgraded Comerica to "underperform" from "neutral" on Oct. 7.

Thirteen of the 30 banks with between $20 billion and $50 billion in assets are anticipated to report quarter-over-quarter increases in EPS, while 14 are expected to report decreases. Analysts expect that three will report no change.

Truist Securities' King anticipate that Pinnacle Financial Partners Inc. and Glacier Bancorp Inc. will be among the banks with the highest NII sequential growth forecasts, while United Community Banks Inc. is expected to see NII compression. Meanwhile, Banc of California Inc. and Prosperity Bancshares Inc. were among the banks upgraded by Wedbush Securities in September.

Of the 25 banks with between $10 billion and $20 billion in assets, eight are anticipated to report higher EPS quarter over quarter, while 14 are expected to report lower. Three are not expected to report any change.

Truist Securities expect Trustmark Corp. to be one of the banks with the highest NII sequential growth forecasts.