The abrupt collapse of Silicon Valley Bank and Signature Bank threw the entire industry into turmoil and exposed fissures in the financial foundations of some smaller banks.
A month later, the nation’s biggest banks are raking in billions and will likely keep doing so even if the economy softens. But regional lenders are seen as more at risk. Deposits are falling and the cost of keeping customers is rising, eating into profits. And fears remain about the value of investments and loans, especially ones backed by real estate.
On Friday, Moody’s downgraded the ratings of 11 regional banks, citing “a deterioration in the operating environment and funding conditions.”
The downgrades came at the end of a week in which regional bank leaders, in calls with investors about their latest financial results, tried to cast the crisis as a moment that had passed. One of the banks attracting the most concern among investors, First Republic, is set to report its results on Monday after the markets close.
Deposits are down, but executives say the declines are manageable.
The runs on deposits that brought about the sudden demise of Silicon Valley Bank and Signature Bank did not spread as widely as some feared. Still, savers seeking the perceived safety of larger institutions took their money out of many smaller banks in recent weeks.
Deposits fell roughly 1 percent, on average, at a selection of about 20 small and midsize banks that reported first-quarter earnings last week, according to analysts at UBS, who described it as “solid” given the circumstances.
In the aftermath of Silicon Valley Bank’s failure, tech clients in particular have bolted from smaller banks.
Western Alliance, an Arizona bank hit hard by the turmoil, lost more than 40 percent of its deposits from tech clients — and that was still “less than anticipated,” said Kenneth A. Vecchione, the bank’s chief executive. Overall, deposits at the bank fell by 11 percent in the first quarter, as lenders like his were “suffering from the taint of SVB’s failure,” he told analysts. But deposits then stabilized, returning to growth in the first few weeks of April, Mr. Vecchione said.
Rising interest rates are a blessing and curse.
As the Fed has raised its benchmark interest rate, banks have increased the rates they charge for loans much more aggressively than what they pay out on deposits. That bolstered earnings at many banks last quarter, including PNC Financial Services, the country’s sixth-largest bank.
A so-called super regional lender based in Pittsburgh, PNC said its profit grew by nearly 20 percent in the first quarter, compared with the same period last year. But it may not last.
Those loans are financed by deposits, which are becoming more expensive. Savers are looking to money-market funds and other higher-yielding options, forcing banks to pay more to hold on to their deposits. At PNC, in the first quarter noninterest-bearing deposits fell 5 percent, while interest-bearing deposits rose 2 percent.
This trend, which is playing out across the industry, reduces profit margins and makes banks more reluctant to lend. The shift in deposits “is, for lack of a better word, ugly,” the UBS analysts noted.
“The marginal cost of funds for the U.S. banking system has just gone up a lot as a result of this flurry,” said William S. Demchak, the chief executive of PNC.
Commercial real estate is a growing worry.
Regional banks provide the bulk of loans to the commercial real estate market, and as more attention turns to the potential risks lurking on bank balance sheets, these loans are making investors nervous. A combination of office vacancies and a coming wave of refinancings at sharply higher rates has forced many banks to set aside more money to shield against defaults.
The white-collar remote work revolution may permanently reshape the office market, bankers said. “Office is going to be really a challenged for quite a few years, and it has a lot to do with remote work,” said Michael Morris, the chief credit officer at Zions Bancorporation, with headquarters in Salt Lake City. The bank increased its allowance for credit losses by more than 30 percent in the first quarter versus last year.
Cleveland-based KeyBank, one of the nation’s largest commercial real estate servicers, has seen what Christopher Gorman, the bank’s chief executive, described as a “huge surge” in demand for special servicing, the process for handling troubled loans. Office projects have recently eclipsed retail buildings as the biggest category of loans in special servicing, Mr. Gorman said.
A credit crunch could tip the economy into recession, hurting banks’ profits.
Banks are tightening their lending standards, though they have cast the changes as tweaks, not a major pullback.
“We try to be the same through good times and bad, right, because what our clients value is consistency,” said Darren J. King, the chief financial officer at M&T Bank, with headquarters in Buffalo.
Still, echoing the warnings big bank leaders have been issuing, smaller banks are bracing for a downturn. Bruce Van Saun, the chief executive of Citizens Financial Group, based in Providence, R.I., said his bank was adjusting its lending decisions to account for the likelihood of “a short, shallow recession.” Truist, the nation’s seventh-largest bank, with headquarters in Charlotte, N.C., said it was being more cautious about extending credit in what Michael Maguire, the bank’s chief financial officer, called “an increasing risk environment.”
But many said they believe the tumult set off by Silicon Valley Bank’s collapse is now in the rearview mirror.
“The waters are calmer,” said Mr. Vecchione of Western Alliance. “I like to think we did OK through this whole crisis here.”
Western Alliance was downgraded two notches by Moody’s, which cited concerns about the bank’s rising credit costs and reduced profitability.
Speaking two days earlier, Mr. Vecchione added a note of caution to his comments: “I want to be careful that I’m not like George Bush, that things are signed on the aircraft carrier that says ‘Mission Accomplished,’ right?”