The super-regional banks have all reported earnings results for the first quarter and the results showed pressure on funding costs and deposits as expected. But they also showed some stabilization, in that there were no huge surprises.
Following the start of the banking crisis in March, investors have been laser-focused on deposit trends and deposit costs, given that several banks have failed because of deposit runs. Going forward, deposit trends are likely going to determine which of the large regional bank stocks performs the best. Let's take a look at which performed the best in Q1.
Analyzing deposit trends
When I say super-regional banks, I am referring to those with more than $100 billion in assets, although this analysis looks at nine bank stocks with between $150 billion and $700 billion in assets. I also consider all these banks to be more traditional regional banks that are not overly concentrated on one type of customer, like SVB Financial was.
To see how deposit bases were holding up, I looked at the decline in noninterest-bearing (NIB) deposits, those the bank pays no interest on, in Q1 on a period-end basis. I also looked at the change in total funding costs, or interest-bearing liabilities, on an average basis in Q1, and management's expectations for each bank's terminal deposit beta, meaning what the beta will top out at during this interest rate hiking cycle.
A deposit beta looks at how much a bank will increase its deposit costs in response to the Federal Reserve hiking interest rates over a set period of time. For instance, if the Fed hikes rates by a half-point and a bank raises its deposit costs by a quarter-point in response, then the beta is 50% (0.25%/0.50%). The lower the beta, the better, because it means a bank's customers are less sensitive to rate hikes. Here's a look at how things played out in Q1.
| Bank | Change In NIB Deposits | Change In Cost Of Total IBL In Q1 | Terminal Beta Expectations |
|---|---|---|---|
| U.S. Bancorp (USB 1.56%) | -9.5% | 0.51% | 40% |
| PNC Financial Services Group (PNC 0.29%) | -5.2% | 0.65% | 42% |
| Truist Financial Corp (TFC -0.13%) | -5.2% | 0.72% | 44% |
| Citizens Financial Group (CFG 1.57%) | -10% | 0.56% | ~Low 40s |
| Fifth Third Bancorp (FITB 0.46%) | -7% | 0.62% | 47% |
| M&T Bank (MTB 0.75%) | -8.4% | 0.88% | ~40% |
| Huntington Bancshares (HBAN 0.95%) | -3.7% | 0.71% | ~37% |
| KeyCorp (KEY 1.43%) | -8.6% | 0.70% | ~Low 40s |
| Regions Financial (RF 2.17%) | -6.2% | 0.37% | 35% |
Data source: Bank earnings reports and transcripts.
As you can see from the data above, Huntington Bancshares saw the smallest decline in NIB deposits, although keep in mind that these numbers could be influenced by how big that base is to begin with. For instance, Huntington only had roughly 25% of its total deposit base in NIB deposits, which is lower than some of its peers. Regions had the smallest rise in its IBL costs, but also keep in mind that this is on an average basis and we know that deposit costs likely got much more expensive toward the end of Q1, when the banking crisis began.
Still, I view Regions as the best overall performer on deposits in the quarter when you consider not only its IBL costs but also management's expectations for the terminal beta, which is the lowest in the group. Regions managed to outperform because roughly 70% of its deposit base is from retail clients (90% of which are insured by the FDIC), many of which are lower balances. These balances are less rate-sensitive because 4% or 5% interest is not as meaningful for these customers as it would be for larger-balance deposit clients.
Regions spoke further about this trend on its earnings call in January. The bank is based in the Southeast region of the U.S., which is currently experiencing the fastest population growth in the country. Additionally, the cost of living can be cheaper in this region. Management also spoke about how its lower-income customers benefited from things like a rise in the minimum wage that lifted their savings and should be more permanent than just a temporary stimulus.
Can Regions keep it going?
In this kind of high-rate environment, banks are largely operating in the unknown, and it's not entirely clear how sticky these lower-cost deposits will continue to be. But so far, Regions has walked the walk with its first-quarter deposit beta at just 19%, which is far outperforming peers, so a terminal deposit beta of 35% does seem realistic. Regions' deposit performance also explains why its stock currently trades at the highest valuation in this peer group on a price-to-tangible book value basis.
