Profit risks for 10 large regional banks: How a reversal of pandemic deposit trends could cut earnings

David Konrad, managing director of equity research at Keefe, Bruyette & Woods provided two sets of earnings estimates for 10 large regional U.S. banks, based on the firm’s expectations that deposit mixes will revert to 2019 levels, and another “what if” scenario.

Bankers love checking accounts. They typically pay no interest on the cash and can draw fee income in various ways while processing checks and handing high volumes of other transactions for corporate clients. During the long period of the Fed’s quantitative easing, including a vast increase in the U.S. money supply as the central bank purchased trillions of dollars of bonds, prices of most risk assets (such as stocks, bonds and real estate) increased. All together, this helped lead to a spike in demand deposits.

Here are totals for noninterest-bearing deposits (NIBD) for the 10 banks KBW looked at as of March 31 and looking back four years. The banks are sorted alphabetically and all of the numbers are in billions:

Based on the numbers above, here are year-over-year changes for the group’s noninterest-bearing deposits over the past four years through March 31:

For Truist Financial Corp.
TFC,
the 84% increase in March 2020 NIDB from a year earlier reflected the old BB&T’s acquisition of SunTrust of Atlanta to form Truist.

The growth numbers were solid even in March 2020, just when the COVID pandemic was beginning to disrupt the U.S. economy, and for the most part continued through March 2022, which is when the Fed began to raise the federal-funds rate and gear up to reduce its bond holdings. The numbers for the first quarter of 2023 speak for themselves.

A decline in noninterest-bearing deposits and possible outflow of other deposits as savers seek higher yields tempered banks’ advantages from rising interest income on new or adjustable loans as interest rates rose over the past year. A bank’s net interest margin (NIM) is its average yield on loans and securities investments less its average cost for deposits and wholesale borrowings. But NIM isn’t a GAAP calculation; banks don’t use a uniform method to calculate it.

So here are FactSet’s calculations for the group’s net yields on average earning assets for the first quarter and previous four quarters:

Most of the first-quarter net yields were much higher than those a year earlier. A few figures in the table are bolded, to highlight that KeyCorp
KEY
and PNC Financial Services Group Inc.
PNC
showed the least improvement in net yields from a year earlier and that PNC was the only one to show a sequential narrowing of its net yield during the first quarter.

Konrad wrote: “We currently expect noninterest-bearing deposits to shrink [as a] percentage of total deposits to pre-COVID levels (2019).” But he acknowledged that this “may not be the best baseline” because interest rates in 2019 were lower than they are today and because “it has never been easier for customers to move money.”

KBW’s current 2024 earnings estimates for the group incorporate the expectations that deposit mixes will revert to 2019 levels. But Konrad provided a second set of estimates based on reversions to deposit-mix averages from 2004 to 2010:

“In our view, KEY, USB and WFC are best positioned while MTB, RF and TFC are more at risk” for earnings declines from shifting deposit mixes, especially in the scenario of a reversion to 2004-2010 deposit mixes, Konrad wrote.

Among the 10 large regional banks, KBW has “Outperform” ratings on Fifth Third Bancorp
FITB,
U.S. Bancorp
USB
and Wells Fargo & Co
WFC,
with neutral ratings on all the others, except for PNC Financial Services Group Inc.
PNC,
which the firm rates “Underperform.”

Here’s a summary of opinion about the 10 banks among analysts polled by FactSet:

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