Regions Financial expects to lose up to another $5 billion in deposits early this year if the Federal Reserve continues to raise interest rates.
The Birmingham, Alabama company said during its earnings call on Friday that it had already lost $7 billion in deposits during the fourth quarter, a 5% decrease from the same period a year earlier. Regions chief financial officer David Jackson Turner cited the revision of deposit prices in response to the Federal Reserve’s rate hikes to fuel the runoff.
But Turner did not expect the bank with assets of $155 billion would need to turn to wholesale funding to make up for lost deposits. The company’s loan-to-deposit ratio was 74% in the fourth quarter, an increase of 4 percentage points from the third quarter.
“Our deliberate approach to managing liquidity allows for deposit normalization and balance sheet growth without the need for significant wholesale borrowing anytime soon,” Turner told analysts during the fourth-quarter earnings call on Friday.
“We expect to see a stabilization of deposit balances by mid-year, with modest growth potential in the second half of the year,” he added.
Deposit runoff has hit corporate banking the hardest, which reported a 13% drop compared to the same period last year. Turner noted that Regions had lost as much as $3 billion in corporate deposits as these customers “seeked higher rates that we weren’t willing to pay” for their excess cash.
But he added that Regions still maintains the operating accounts for these businesses. That means the bank could always seek deposits from these corporate clients before turning to wholesale funding if the need arises. Using short-term debt was also an option, Turner said.
“We’ll have to look at the full cost of all of our opportunities at that point, which as I said before, will really be in the second half of the year,” he said during the earnings call.
In addition to the fall in corporate banking, interest-free deposits fell 12%, a trend that should continue in 2023.
“We experienced a remix from non-interest bearing deposits to other options both on and off the balance sheet, including those offered through the treasury management platform,” Turner said.
Regions wraps up a week of earnings releases in which many banks reported lower deposit levels and faced questions about future funding sources.
While the Bank of America reported A $6.2 billion decrease in consumer banking deposits compared to the same period last year, M&T Bancorp said it plans to issue up to $4 billion in senior debt to make up for an expected deposit shortfall.
Meanwhile, Comerica CFO James Herzog said the declines were “better than we expected” and sees signs that Cost pressures could ease this year.
As deposits decline amid Fed rate hikes, net interest income is expected to continue to grow, albeit at a slower pace than last year. Regions reported $1.4 billion in net interest income, an increase of 32% over the same period last year. Management expects net interest income to grow 13-14% in 2023.
“Net interest income growth is expected to continue until the Federal Reserve reaches the end of its tightening cycle,” Turner said.
Regions reported an increase in net income, generating $685 million during the fourth quarter, up 56% compared to the same period last year. Overall, the bank generated $2 billion in total revenue, an increase of 22% over the same period last year, while non-interest expenses of $1 billion fell 3%.
Non-interest income of $600 million fell 2% compared to the same period a year ago due to declines in the bank’s capital markets and mortgage businesses.
Regions’ fourth-quarter earnings per share of $0.70 was above the $0.65 median estimate of analysts surveyed by FactSet Research Systems.
