US bank profits fall as competition for deposits erodes lending margins

By Chibuike Oguh

NEW YORK (Reuters) - Several large U.S. regional banks reported lower profits on Wednesday, a further sign that the 2023 income boost from high interest rates is starting to wane.

Charles Schwab, Citizens Financial and US Bancorp said that, along with one-off charges, the rising cost of retaining customer deposits ate into fourth-quarter net interest income (NII), the difference between what banks earn from lending and pay on deposits.

Federal Reserve rate hikes last year aimed at taming inflation boosted many lenders' NII. But growing competition for deposits from the country's biggest banks is eating into mid-tier bank profits and in some cases subduing loan growth.

Big banks benefited from an exodus of deposits from small institutions, which were seen as riskier, after Silicon Valley Bank and two other regional lenders collapsed last year.

Charles Schwab's quarterly profit fell 47%, partly due to a 30% drop in NII on higher deposit costs. Schwab paid an average of 1.37% on deposits, compared to 0.46% a year earlier, it said.

Citizens reported a 71% decline in profit, with NII down 12%. US Bancorp's profit fell 14% as NII dropped 4.2%. On Tuesday, PNC Financial, another big regional lender, said profits shrank, with NII contracting 8%.

The outlook for NII is weak, some banks have said. Citizens, for example, warned that its NII this year could be 6% to 9% below the $6.24 billion in 2023.

At 11 U.S. regional banks with assets of $50 billion to $100 billion, analysts expect earnings per share to drop from 2023 mostly due to increased deposit costs, according to LSEG estimates, Reuters previously reported.

The KBW regional bank index was last down 1%, in line with the broader market.

As with the largest U.S. lenders which reported earnings on Friday, regional banks also took big one-time charges to replenish the Federal Deposit Insurance Corporation's (FDIC) deposit insurance fund, which was dented by the regional banking crisis.

JPMorgan, Bank of America, and Citigroup posted lower profits on Friday, in part due to lower NII.

Executives at these top banks were upbeat on the economy, noting American consumers remained resilient even as defaults on consumer loans are returning to pre-pandemic levels. But major questions hang over markets, including whether the economy will avoid a recession, as inflation eases and the Fed is expected to cut interest rates this year.

"I am a little on the cautious side," JPMorgan Chief Executive Jamie Dimon told CNBC on Wednesday when asked about the U.S. economy.

(Reporting by Chibuike Oguh in New York; editing by Michelle Price and Richard Chang)