Written by Niket Nishant and Manya Saini
(Reuters) – Third-quarter profits at U.S. regional banks beat Wall Street expectations as a resurgence in deal trading pushed up investment banking fees, offsetting higher deposit costs.
Capitalizing on the stock market rally, underwriting and M&A activity accelerated, banking on economic resilience and expectations for further interest rate cuts from the Federal Reserve this year.
“All odds are in our favor for increased dealmaking,” said David Russell, global head of market strategy at TradeStation.
“As interest rates fall over the next six to 12 months, we are likely to see more transactions.”
The results highlighted the growing relevance of investment banking to regional players.
While these services have primarily been the domain of Wall Street giants such as JPMorgan Chase & Co. (NYSE:), Goldman Sachs, and Morgan Stanley, regional banks have carved out a niche among middle-market companies. .
“Improving credit spreads and lower interest rates are encouraging debt issuance, and high equity valuations should encourage initial public offerings (IPOs),” said Stephen Biggar, financial services analyst at Argus Research. , added that improved CEO credibility is also driving mergers and acquisitions.
Investment banking profits allow regional financial institutions to cushion the blow from higher deposit costs caused by paying more interest to prevent customers from moving to alternative financial institutions such as money market funds. I was able to do that.
Biggar said those pressures could ease if the Fed cuts rates further.
Huntington Bancshares (NASDAQ:), Trust Financial (NYSE:), KeyCorp (NYSE:) and M&T Bank (NYSE:) on Thursday reported better-than-expected third-quarter profits.
“This momentum could continue beyond the election and into the end of the year,” said Michael Ashley Shulman, chief investment officer at Running Point Capital.
“Increased M&A and the continued reopening of the IPO market should further increase fees and support earnings.”
Normalization rather than deterioration
Banks are allocating more reserves for potential loan defaults as consumers burn through savings accumulated during the pandemic, but executives say the increase is not alarming.
“The increase in loan loss reserves that the industry is seeing is driven primarily by normalization rather than widespread credit deterioration,” said John Brann, CEO of Flushing Financial (NASDAQ:). “It has been done,” he said.
Still, local banks may need to manage their loan books carefully, especially since they are heavily exposed to the troubled commercial real estate (CRE) sector.
Macrae Sykes, portfolio manager at Gabelli Funds, said: “In general, there is more concentration[among smaller banks]in some of the more difficult CREs, and fundamental improvements will be made in managing these loans.” It depends on improving the environment.”
