Regional Banks Keep Taking It on the Chin

Larger banks will gain market share, says Fitch Ratings.

Regional banks will continue to see an “unfavorable U.S. operating environment” into 2024, according to a new Fitch Ratings report.

Not that any banking institution has it easy. “All U.S. banks will need to take defensive measures to conserve capital and provision for higher expected losses, given scarcer opportunities for revenue growth amid a restrictive rate environment, rising regulatory requirements and capital costs, and less benign credit quality,” the company wrote. At the same time, under a higher-for-longer scenario and with greater scale, larger banks will likely take market share, according to the analysis.

This is not good news for commercial real estate. According to Steven Blitz, chief U.S. economist and managing director of global macro for TS Lombard, the banking industry is seeing small and large banks moving in two opposite directions. The smaller banks are growing loans and large deposits while the larger banks have become more cautious and are holding more cash. Given that regional banks have become an important source of CRE lending, seeing them lose market share isn’t a positive move.

Fitch says that in the third quarter of 2023, the 20 largest banks saw aggregate revenue remain flat quarter over quarter but rise 8% year over year. Net income increased 4% quarter over quarter and 10% year over year.

“The largest banks, such as Bank of America Corporation (BAC), JPMorgan Chase & Co. (JPM) and Wells Fargo & Company (WFC), all reported double-digit YoY net income growth, reflecting strong performance,” Fitch wrote. “Card issuer American Express Company also reported double-digit earnings growth YoY, thanks to net revenue growth and provisioning declines.”

“However, a number of smaller institutions reported earnings declines, with a majority reporting quarterly results during the quarter below the year-earlier period, reflecting weaker revenue, margin compression, provision growth and elevated expenses,” they added.

Where this will intersect hardest with CRE is through weaker loan growth to persist along with competition for deposits. “In addition, newly proposed regulatory capital and funding requirements will further raise costs and pressure returns, spurring balance-sheet optimization efforts and shifts in business mix toward deposit-rich sectors,” Fitch said.

“Most notably, large regional banks focused on commercial loan growth saw the weakest credit demand, which fell uniformly from the prior quarter, and in some cases reached double digit declines on an annualized basis, further exacerbated by defensive actions to shore up liquidity and capital. Across all banks, a marked sequential slowdown in credit card growth — a rare source of robust origination in prior quarters — signals a continued slump in lending over coming quarters.”