(Bloomberg) -- Regional banks began to turn the corner on net interest income in the second quarter, yet questions remain about their exposure to the troubled commercial real estate market.
PNC Financial Services Group Inc. and M&T Bank Corp. reported their first quarterly NII increases since 2022, while US Bancorp snapped a streak of four quarterly declines, with the banks crediting deposit growth, loan-repricing and so-called balance-sheet optimization, or better management of assets and liabilities. For instance, M&T’s NII was bolstered by moving a big chunk of cash into securities.
The results from a clutch of midsize banks—along with commentary this week from giants including Bank of America Corp.—indicate that US lenders have hit the “trough” when it comes to NII, which cratered in the first quarter as interest rate hikes sapped loan demand and jacked up deposits costs. NII, the difference between what banks earn on their assets and what they pay on debts, is particularly important for regional lenders that lack the robust trading and sales operations of their larger rivals.
“We’re seeing or have reached the trough in both net interest margins and net interest income,” Bloomberg Intelligence analyst Herman Chan said. “A lot of the banks have talked about improving margins because of the repricing of fixed-rate assets, both loans and securities.”
KeyCorp expects tailwinds from short-term swaps, treasuries and other assets rolling off to help raise NII by at least $120 million in the fourth quarter, an increase of more than 13% from second quarter results, according to Chief Executive Officer Chris Gorman. PNC boss William Demchak said the bank was on track to reach record NII in 2025.
Citizens Financial Group Inc. expected to see a rebound in the fourth quarter, preceded by a decrease next quarter driven by “one last step-up” in swap costs, Chief Financial Officer John F. Woods said during Wednesday’s call. The bank expects two interest rate cuts from the Federal Reserve before the end of the year to spur lending and client activity.
The chatter boosted investor sentiment in the sector. The KBW Regional Banking Index started the week with its best three-day stretch since January 2021.
Commercial real estate
While the forecast for NII was positive, commercial real estate continued to drag on results amid a downturn in office occupancy spurred by remote work.
Office-related CRE chargeoffs were up by about 22% at PNC, year over year. US Bancorp’s CRE chargeoffs were up by about 38%. Overall loan losses were up 8% at M&T as it shrunk its CRE portfolio.
“We’ve made tremendous progress and we’re getting close to the level where we think we can basically level out and start to operate,” Chief Financial Officer Daryl Bible said in an interview, referring to its CRE loans. “Hopefully we’ll get to those levels in the next quarter or two.”
--With assistance from Bre Bradham.
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