Regional US banks prioritize lower deposit costs over growth in Q2

Many regional banks sacrificed deposit growth during the second quarter in favor of managing deposit costs down.

Five out of 10 banks with assets between $100 billion and $1 trillion that reported earnings between July 16 and July 25 saw quarter-over-quarter deposit declines. Year over year trends were better, with seven of the 10 recording increased deposits. As regional banks prioritized managing deposit costs over growth, net interest margins (NIMs) rose for nearly all banks both quarter over quarter and year over year.

KeyCorp's deposits fell the most among the group on a quarterly basis, dropping 2.5% to $146.91 billion. The company rolled off some higher-cost commercial deposits and $1.4 billion in maturing retail certificates of deposit (CDs) as it prioritized lowering deposit costs over growing its balance sheet.

"We didn't feel the need to match those offers. Those remain clients, and we could go back to those dollars if we needed them," CFO Clark Khayat said about the commercial deposits.

KeyCorp's total deposit cost was 1.99% in the second quarter, down from 2.06% in the linked quarter, according to an earnings presentation.

In the second half of the year, deposits should grow since the company will not be as aggressive on managing deposit costs, Khayat said during the earnings call.

"We think we have a little bit, all other things being equal, a little bit of pricing opportunity here just as CDs and [money market deposit account] promos roll off. But we're watching that closely," the CFO said. "But I don't think we will be as rate-oriented in the second half."

KeyCorp's net interest margin got a boost from the deposit pricing discipline, up 9 basis points quarter over quarter and 60 basis points year over year.

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Citizens Financial Group Inc. posted the second-steepest total deposit decline, down 1.4% from the linked quarter to $175.09 billion. The company also aimed to decrease deposit costs in the second quarter, reducing higher-cost treasury broker deposits and retail CDs.

As deposit competition intensifies, Citizens Financial is focused on "the kind of relationships that you want to bring on to the balance sheet and then also [passing] on the things where you're not going to make a lot of money, where it's just a price game," said Donald McCree, senior vice chair and head of commercial banking, during an earnings call.

Citizens Financial's NIM was up 8 basis points both sequentially and year over year.

U.S. Bancorp grew deposits the most among banks with between $100 billion and $1 trillion in assets, up 1.2% quarter over quarter. Year over year, however, the company's deposits fell 1.0%.

Despite recording an increase in total deposits, its total average deposits shrank quarter over quarter as the company prioritized noninterest bearing and low-cost consumer deposits, Vice Chair and CFO John Stern said during an earnings call.

"We're being active in remixing our deposit mix. ... We moved out of some high-cost corporate and single-serve client, and we had moved into more of our consumer deposit base," the CFO said.

Despite the remix, U.S. Bancorp's NIM was down 4 basis points quarter over quarter, making it the only regional bank to see a sequential NIM decline.

Conversely, Regions Financial Corp.'s NIM improved the most among its large peers, up 17 basis points from the linked quarter.

Earnings float higher

All of the 10 US banks with assets between $100 billion and $1 trillion posted earnings per share gains quarter over quarter, but just three beat analyst estimates.

Three of the banks posted earnings misses versus consensus estimates. M&T Bank Corp.'s 2-cent miss was the largest.

Year over year, all but First Citizens reported higher EPS.