Regional bank growth is being impeded by higher rates

Alongside their larger counterparts, regional banks have been reporting quarterly results, revealing an expectation for in net interest income (NII) declines this year as higher interest rates impeded loan activity. Regional banks have been upping their efforts to retain customers, in-turn raising deposit costs.

Furthermore, Comerica (CMA) could see its contract with the US Department of Treasury for its Direct Express card expire in 2025.

Wedbush Securities managing director of equity research David Chiaverini joins Market Domination to give insight Comerica's outlook and the broader regional bank environment.

Chiaverini outlines what growth could look like moving forward: "So net interest income (NII) and net interest margins, we are expecting them to be kind of stabilizing here in the second quarter and third quarter. The key factor for the driver behind NII is, as you noted, loan growth. And unfortunately, it's the messaging coming from the regional banks this week is that loan growth is tepid and is likely to remain tepid in the near term.

"What could accelerate and be the catalyst for increased loan growth is lower interest rates. Loan demand right now is low because many borrowers are viewing the high cost as a headwind to them wanting to take out additional loans. So lower rates could be a very nice catalyst for the loan growth."

Yahoo Finance also spoke with Fifth Third Bancorp (FITB) CEO and President Tim Spence earlier in the day.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Nicholas Jacobino

Video Transcript

Regional bank saw profits in that interest income fall year over year in its most recent quarter.

The bank also saying it's exclusive deal with the Treasury's debit card is likely to end.

Joining us to discuss is David, managing director at We Bush covering mid cap and regional banks.

David, it's always great to see you to talk regional banks.

Maybe not the happiest day for Comerica Bulls though.

When you look at that agreement that looks like it's likely to end.

What kind of effect is this gonna have at Comerica and kind of how does it push forward from here?

Yeah, so it is uh unfortunate development for America to lose the Direct Express uh business.

So this represented the bottom line here is that it could impact their net interest income by 100 and 65 million is what we calculate because it represented an average of 3.3 billion of no interest bearing deposits.

So if those deposits uh non interest bearing deposits are invested in a cash type of investment of 5% that's where we get the 165 million and it represents about 15% of EPS.

So that's why we're seeing the negative stock reaction today.

I'm curious, David, as you look at your coverage universe, um and just looking a little farther out, are, are there reasons uh for optimism, David, you know, potentially lower rates?

Um you know, maybe uh changes in administration with less regulation.

How, how are you feeling about it?

Yeah, it's a great question.

You hit the nail on the head on, on both of the key factors.

Uh lower interest rates can help credit quality, it can help ease uh deposit costs.

And then on the, you know, political front, if we do get a Trump administration that could lead to deregulation and potentially an increase in M and a activity, there's been a lot of hand wringing over the past few years.

When deals are announced, it takes a long time for the approval to go through.

We think in AAA change in administration could accelerate the time in which it takes to approve a deal and could encourage additional deals to come through.

Uh on the flip side here.

Um What are we looking at in terms of?

And I guess these um items are sort of agnostic to politics, right?

Net interest uh income and how that looks going forward as well as loan growth going forward.

How are you sort of modeling those two things out?

Yeah, so net interest income and net interest margins.

We are expecting them to be kind of stabilizing here in the second quarter and third quarter.

The key factor for the driver behind NI I is, as you noted, you know, loan growth and unfortunately, it's the messaging coming from the regional banks this week is that loan growth is tepid and is likely to remain tepid in the near term.

And what could accelerate it be the catalyst uh for increased low growth is lower interest rates.

Loan demand right now is low because many borrowers are viewing the high cost as a headwind to them wanting to take out additional loans.

So lower rates could be a very nice catalyst for the for the loan growth.

Some other picks, David, I want to get your thoughts on first citizens as a name.

I know you like how come David?

It's had a nice run here already up about 30% this year.

Yeah, one of the key things with first citizens that I'm anticipating when they report earnings next week is a potential sizable stock repurchase plan.

Uh So their capital levels are among the highest of the regional banks at 13.5% ce T one ratio.

They say that they want to get that down to around 10.5% by the end of next year.

So that implies they could be buying back stock upwards of a billion dollars per quarter.

Uh looking out over the next six quarters.

Now we do anticipate they'll either announce it with earnings next Thursday.

Or shortly thereafter.

Um Another bank that you like is M and T bank which already reported its numbers.

Um The shares already up around 21% a year to date and they had a pretty positive reaction to the print also.

How much more upside do you think they're gonna get?

And, and where is that catalyst gonna come from?

Yeah, so we're anticipating about 20% upside to M and T they too um announced that they're resuming cherry purchases in the second half of the year.

They have more capital flexibility and they did take their NI I guidance incrementally higher with the earnings print.

And then probably one the most important things is credit quality for M and T. They announced with earnings that their criticized assets came down in the quarter and that's been one of the pushback items when I talked to investors is their credit performance.

But now that we're seeing this inflection on criticized assets, we think that there is room for upside for M and T David.

So good to have you on the show today.

Have a great weekend.