Many smaller banks posted dismal fourth quarter earnings as depositors continue to flee to booming megabanks that have been unfazed by interest rate hikes and a crisis that shook the sector early last year, according to The Wall Street Journal.
Net income was down substantially at many small and regional banks in the fourth quarter, including KeyCorp, Citizens Financial Group, PNC Financial Services Group, Comerica and Zion Bancorporation, falling 90%, 70%, 40%, 90% and 50%, respectively, according to the WSJ. Despite the poor performance at the small and regional level, America’s megabanks — JPMorgan, Bank of America, Wells Fargo and Citigroup — saw their earnings increase 11% during 2023 to over $100 billion. (RELATED: Home Sales In 2023 Were The Lowest In 28 Years As Affordability Crisis Plagued Americans)
“We’re in a very uncertain economic period here,” Chris Gorman, chief executive at KeyCorp, told the WSJ. “It requires that we run many scenarios as we just figure out the full range of possibilities.”
Many depositors in 2023 fled from smaller banks to megabanks following a string of bank failures early in the year that threatened smaller players who could not effectively absorb losses as well, according to the WSJ. The Federal Reserve has also raised its federal funds rate to a range of 5.25% and 5.50% in an effort to tame high inflation, which disproportionally hinders smaller banks from offering the same deposit returns that megabanks are able to.
National financial conditions are now at their loosest since Nov ’21 (or Feb ’22 if looking at adj. index) – rate hikes and QT have apparently done nothing as almost $2 trillion of reverse repo and billions of emergency lending flood the market w/ liquidity… pic.twitter.com/OWkVusoarn
— E.J. Antoni, Ph.D. (@RealEJAntoni) January 24, 2024
The current pressure on smaller banks could be eased in 2024, with a median of Fed governors at the December Federal Open Market Committee projecting three rate cuts before the end of the year, enabling them to compete in terms of deposit returns with megabanks.
The failures in the banking sector began with a bank run at Silicon Valley Bank and spread to First Republic and Signature banks, prompting the Federal Deposit Insurance Corporation (FDIC) to step in and take over the failing banks. The FDIC eventually created an auction among top banks to facilitate the sale of First Republic, which JP Morgan bought.
The debt-laden American commercial real estate industry also poses a unique threat to the smaller banks due to their disproportionate portfolio dedicated to the sector. U.S. banks outside of the top 25 in terms of assets hold around 67.2% of loans in commercial real estate but only 37.6% of all loans.
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