Investor Focus on Regional Banks’ Earnings Margins and Net Interest Income

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Investor attention is zeroed in on small and regional banks’ margins and net interest income as the earnings season approaches, RBC Capital Markets noted on Tuesday. While credit quality is acknowledged as a medium-term concern, the immediate focus lies in the financial metrics tied to the banks’ earnings.

In a note to clients previewing the second-quarter earnings for 24 lenders under RBC’s coverage, including First Commonwealth Financial, New York Community Bancorp, and Valley National Bancorp, RBC projects a favorable trajectory for net interest income among many regional banks. This optimism is based on the prevailing high-for-longer interest rate environment.

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According to the brokerage, most lenders have seen their margins and net interest income stabilize, even as the Federal Reserve has extended the timeline for its anticipated rate cuts. Despite a slowdown in loan growth earlier this year, sequential improvement is expected.

Jon Arfstrom, RBC’s Associate Director of US Research, emphasized that near-term investor questions are concentrated on margin and deposit assumptions, with expectations for the second half of the year drawing significant interest. Investors are particularly keen on any signs of recovery in loan activity and shifts in deposit mix as the year progresses.

Credit quality remains a medium-term issue, with investors keeping a close watch on updates regarding the health of corporate real estate and multifamily portfolios. Current management commentary suggests that asset quality metrics are performing as anticipated, Arfstrom noted.

RBC has made slight adjustments to its second-quarter per-share earnings estimates for banks and has reduced its full-year forecasts by 0.5%. These changes account for lower margin and loan growth assumptions, coupled with higher provisions and reserves.

Arfstrom stated that RBC continues to see value in the banking sector, particularly if the fundamental outlooks for 2024 can be maintained. However, he cautioned that provisions and net interest income outlooks represent the primary risks to current estimates.

Highlighting certain standout performers, RBC pointed to First Horizon, Huntington Bancshares, and Wintrust Financial as particularly well-positioned, thanks to their diversified funding and revenue opportunities and manageable credit quality trajectories. The brokerage remains optimistic about the overall group.