Several regional banks reported sizable drops in profit during the third quarter as they struggled with higher deposit costs and rising loan losses, a reminder that the stresses that roiled the industry in the spring are not entirely over.
The stock of Zions (ZION) plunged by nearly 10% Thursday after the bank reported that earnings fell 19% when compared to the same year-ago period. The stock of Discover Financial (DFS) fell by nearly 8% after it posted a 33% drop in profits. Truist (TFC) fell by more than 2% after disclosing that its profits had declined by 28%.
Regional banks are generally on more stable ground than they were during the first half of the year, when the failures of Silicon Valley Bank, Signature Bank and First Republic in March and May triggered panic about the strength of many other mid-sized banks across the US.
But profitability remains a challenge as high interest rates posed by the Federal Reserve mean deposits are more expensive, paper losses on bonds held for investment go higher, and it becomes more difficult for bank borrowers to pay back their loans.
New capital requirements proposed by US regulators threaten to make it even more difficult for some of these mid-sized banks to earn robust profits in the future.
Regional bank stocks have notably lagged the S&P 500 this year, even as they've recovered from their lows reached back in May. As of Thursday's close, the S&P Regional Bank Index ETF (KRE) was down 31% year to date. The S&P 500, in contrast, has gained 12% this year.
"Things have certainly settled down" in the regional banking world since the spring, Fed Chair Jerome Powell said Thursday after a speech in New York, but added later that "I do think their business model is under pressure."
A big concern for many regional banks is a key measure of profitability known as net interest income, which measures the difference between what banks earn on their loans and pay for deposits.
Higher interest on deposits is squeezing that income for some, including Zions. The Salt Lake City-based institution said the interest Zions paid depositors rose by 95%, to $366 million, and it expects those costs to continue to "increase marginally" even if interest rates don’t go higher.
"The opportunity for improvement will be really largely predicated on our ability to actively manage those deposit rates," CFO Paul Burdiss said.
At Truist, a regional bank based in Charlotte, net interest income also fell 4.3% when compared to the year-earlier period. It paid depositors $1.5 billion in the third quarter, 5.5 times more than it had to pay them in the year-ago period.
"The cost of funding is not free," CEO Bill Rogers told analysts.
Its write-downs and provisions for bad loans also roughly doubled for the same period to $902 million, signs that borrowers are having more problems with their existing debts and that the bank expects loan losses to go up in the future.
The same challenges pulled down results at credit-card bank Discover Financial. Net write-offs and provisions for credit losses both jumped.
Discover CFO John Greene said the bank is seeing “mildly increased stress” among customers with low-to-mid credit scores as credit card delinquencies rise.
Rising concerns about credit were also an issue for Synovus (SNV), where profits dropped 53% from a year ago.
The Columbus, Ga.-based institution set aside $73 million in provisions for bad loans, nearly three times as large as they were a year ago, while it wrote-off $62 million for loans that went bad during the quarter.
Its stock fell more than 2% Thursday.
"Although credit is moderating, we believe that it's still very manageable. It's within the ranges that we had anticipated," Synovus CEO Kevin Blair said.
David Hollerith is a senior reporter for Yahoo Finance covering banking and crypto. Jennifer Schonberger contributed to this article.
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