Regional banks' Q3 earnings threatened by funding pressures

Most regional banks are expected to report lower earnings both quarter over quarter and year over year as funding pressures continue to plague balance sheets.

Among the 69 publicly traded banks with assets between $10 billion and $100 billion and at least five normalized earnings per share estimates from analysts, only seven are expected to post higher quarter-over-quarter EPS, according to an S&P Global Market Intelligence analysis of consensus estimates. Another four are expected to report no change, while the rest are estimated to report lower earnings sequentially.

"The acute phase of bank stress is clearly over, but in its wake several challenges have become exacerbated including funding challenges, balance sheet constraints, dampened loan demand, and potential negative credit migration as [commercial real estate (CRE)] maturities are dealt with," Wedbush analyst David Chiaverini wrote in a note. "We expect another underwhelming quarter for banks given the macro backdrop."

Net interest margins (NIM) and net interest income (NII) stayed under pressure during the third quarter as funding remained expensive, analysts wrote. However, analysts were upbeat on the future of NIM and NII trends, as Piper Sandler analysts believe that NIMs are reaching an "inflection point," while Wedbush's Chiaverini believes that "severe downward revisions" to fourth-quarter and full-year 2023 guidance should be limited.

Credit quality will also be a focus during third-quarter earnings reports, as the Street waits for normalization following near-pristine metrics since 2020. This is of particular interest following recent one-off credit quality issues, higher rates, tighter lending standards and the growing possibility of a recession, the Piper Sandler analysts wrote in a note.

"Based on recent management commentaries, credit concerns are limited, however, we think [nonperforming assets] have seen their cyclical lows and point to an increasing number of banks experiencing one-off issues, including a couple well-publicized writedowns of participation loans/[shared national credits]," they wrote. "We suspect there will be additional problem loans that pop up this quarter, though most banks are not seeing anything systemic."

Wedbush's Chiaverini expects "some incremental degradation of credit" in third-quarter reports, particularly among banks with outsized consumer and CRE exposure.

Banks with $50B-$100B in assets

Wintrust Financial Corp. is the only bank with assets between $50 billion and $100 billion expected to report higher earnings quarter over quarter. Year over year, just Wintrust and Webster Financial Corp. are expected to report a higher EPS. For the rest, earnings are likely to be lower both sequentially and year over year.

Banks with $20B-$50B in assets

In the $20 billion to $50 billion asset range, just three banks — Prosperity Bancshares Inc., SouthState Corp. and Ameris Bancorp — are expected to report higher earnings quarter over quarter. Similarly, only three banks are expected to see higher year-over-year earnings: Texas Capital Bancshares Inc., Bank OZK and Axos Financial Inc.

Banks with $10B-$20B in assets

Banner Corp., Live Oak Bancshares Inc. and Brookline Bancorp Inc. are the only three banks with between $10 billion to $20 billion in assets expected to report higher earnings quarter over quarter, while four are expected to report no change and the rest lower.

Compared with the same quarter a year ago, five are expected to report higher earnings: FB Financial Corp., First Financial Bancorp., Live Oak, First Commonwealth Financial Corp. and Origin Bancorp Inc.