10 regional banks expected to buck a weak industry trend

By Philip van Doorn

These banks are expected to increase their interest margins in 2024, at a time when rising competition for deposits is causing industry profitability to dip

Bank stocks took a pounding on Tuesday, after Moody's downgraded its credit ratings for several smaller regional banks and put six larger players on review for possible downgrades. Below is a screen of bank stocks to highlight 10 that are expected to buck the industry trend for reduced profitability in their core businesses.

The KBW Nasdaq Bank Index BKX was down more than 3% in late morning trading on Tuesday, and it was down 14.9% year-to-date with dividends reinvested. In contrast, the S&P 500 SPX was up 18.8% for 2023.

In its report about the downgrades and the review of six more banks for possible downgrades, Moody's said: "Rising funding costs and declining income metrics will erode profitability, the first buffer against losses."

Moody's also said that although federal regulators' proposed new capital rules are expected to go into effect in July 2025 and be phased in over a three-year period from there, "experience suggests that once draft rules are issued, some banks will begin transitioning to the new standards, and in our view some rated U.S. banks already have begun to undertake actions to transition to higher regulatory expectations for capital, liquidity and loss-absorbing capacity."

The banks will likely have nearly five years from now to comply with the new capital rules, which cannot be finalized until after the current comment period ends in November.

There are many moving parts, and one concern for banks -- unrealized losses on securities portfolios -- will be mitigated over time as bonds mature and are repaid at face value and possibly further if interest rates begin to decline over the next few years, which would lift bond's market values.

Meanwhile, it might be useful for investors to learn which regional banks are expected to become more profitable in their core businesses during 2024.

Among the 139 banks in the S&P Banks Select Industry Index, which is tracked by the SPDR S&P Bank ETF KBE, consensus net interest margins for 2023 and 2024 among analysts polled by FactSet are available for 138, and among those, margins are expected to contract next year for 102 banks.

A bank's net interest margin (NIM) is the spread between its average annualized yield on loans and securities and its average cost for deposits and wholesale borrowings.

At a time when the yield curve for U.S. Treasury securities is inverted and with the federal-funds rate in a target range of 5.25% to 5.50%, banks have been forced to compete for deposits as customers have been seeking higher yields on savings accounts and certificates of deposits. Funding costs are rising more quickly than loan rates for many banks. And if a bank is forced to increase its wholesale borrowings to bolster liquidity, its funding costs may rise further.

A screen of KBE highlights 10 regional banks analysts expect to see their NIM widen by at least 15 basis points in 2024. The list includes PacWest Bancorp (PACW) and Banc of California Inc. (BANC), which announced a merger of equals on July 25. The merger is expected to close late this year or early in 2024, pending votes by both banks' shareholders and regulatory approvals.

Here's the list of 10 regional banks expected to widen their net interest margins by double digits in 2024:

                           Bank  Ticker                   City  Total assets ($mil)  Expected expansion of NIM in 2024  Estimated 2023 NIM  Estimated 2024 NIM 
Pathward Financial Inc.           CASH   Sioux Falls, S.D.                   $7,459                              0.33%               6.09%  6.42% 
PacWest Bancorp                   PACW   Beverly Hills, Calif.              $38,337                              0.28%               2.18%  2.46% 
Coastal Financial Corp.           CCB    Everett, Wash.                      $3,535                              0.24%               7.45%  7.69% 
Banc of California Inc.           BANC   Santa Ana, Calif.                   $9,370                              0.17%               3.22%  3.39% 
Live Oak Bancshares Inc.          LOB    Wilmington, N.C.                   $10,819                              0.17%               3.39%  3.55% 
Prosperity Bancshares Inc.         PB    Houston                            $39,905                              0.16%               2.79%  2.95% 
Atlantic Union Bankshares Corp.   AUB    Richmond, Va.                      $20,602                              0.16%               3.40%  3.56% 
Popular Inc.                      BPOP   San Juan, Puerto Rico              $70,838                              0.16%               3.24%  3.40% 
Nicolet Bankshares Inc.           NIC    Green Bay, Wis.                     $8,483                              0.15%               3.13%  3.27% 
CVB Financial Corp.               CVBF   Ontario, Calif.                    $16,485                              0.15%               3.31%  3.45% 
                                                                                                                                               Source: FactSet 

Click on the tickers for more about each bank.

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Don't miss:These dividend stocks yield as much as 11% while meeting strict criteria for estimated cash flow

-Philip van Doorn

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08-09-23 0717ET

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