Regional banks suffered a steep sell-off Friday after a number of weak quarterly earnings reports highlighting the negative impact from higher interest rates soured investor sentiment toward the industry.
The SPDR S&P Regional Banking ETF (KRE) fell 2.5% in early trading, dragged down by Regions Financial Corp, which tanked more than 12%. Comerica, Berkshire Hills Bancorp, First Bancorp, Amerant Bancorp and Fifth Third Bancorp all tumbled by 5% or more.
Regions Financial, a Birmingham, Alabama-based lender, posted a 6.5% decline in net interest income (NII) compared with the previous quarter. The bank also expects a further drop in NII, seeing a 5% decline in the fourth quarter.
NII is the difference between interest banks earn on loans and what they pay out on deposits. As interest rates rise, lenders are pressured to pay more to keep depositors.
The Federal Reserve has raised its key borrowing rate 11 times since March 2022 by a total of 5.25 percentage points, and the central bank recently vowed to keep rates higher for longer to combat stubbornly persistent inflation. Higher rates could lead to more losses on banks’ bond portfolios and contribute to funding pressures as institutions are forced to pay higher rates for deposits.
Dallas-based Comerica issued a similar warning as Regions, saying its NII is expected to decline between 5% and 6% in the fourth quarter. The bank reported a $106 million year over year decline in NII to $601 million in the third quarter.
Also feeling the pain is Cincinnati-based Fifth Third Bancorp, which forecast a similar drawdown in the quarter ahead.