Signage displaying the name of Comerica Bank branch in Torrance, California, on March 13, 2023, adds to the gloomy outlook for regional banks. Regions Financial, a lender based in Birmingham, Alabama, reported a 6.5% decline in net interest income (NII) compared to the previous quarter. The bank anticipates a further drop of 5% in NII for the fourth quarter. NII is the difference between the interest earned on loans and the interest paid out on deposits. With rising interest rates, banks are under pressure to pay more to retain depositors.
The Federal Reserve has increased its key borrowing rate 11 times since March 2022, totaling a 5.25 percentage point increase. In an effort to combat persistent inflation, the central bank has pledged to keep rates high for an extended period. These higher rates can result in losses on banks’ bond portfolios and contribute to funding pressures as institutions must pay higher rates for deposits.
Comerica, a bank based in Dallas, echoes Regions’ concerns, stating that its NII is expected to decline by 5% to 6% in the fourth quarter. The bank reported a $106 million year-over-year decline in NII, with third-quarter figures reaching $601 million.
Adding to the list of affected banks is Fifth Third Bancorp, based in Cincinnati, which also anticipates a similar decline in the upcoming quarter.
It’s clear that regional banks are feeling the impact of rising interest rates, with declining NII becoming a prominent issue. As these banks adjust to the challenging environment, it remains to be seen how they will navigate these ongoing challenges.
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