U.S. Regional Banks 4Q 2022 Update: Solid Performance Amid Economic Uncertainty

Fourth-quarter earnings declined modestly from the prior quarter as higher credit provisions more than offset the benefits of higher interest rates, but earnings were up relative to the prior-year quarter, aided by strong net interest income growth. Nonetheless, regional banks reported strong profitability in the fourth quarter, with median return on average equity (ROAE) of 13.4%, versus 13.0% in the previous quarter.

...NII should increase moderately amid rising interest rates and continued loan growth. But noninterest income could remain subdued given depressed mortgage volumes, capital markets activity, and asset valuations. We think regulatory capital ratios are generally near target levels for most regional banks, and continued loan growth may limit common share repurchases. We expect credit metrics to normalize gradually, but regional banks are generally well-positioned to absorb higher loan losses that we expect. Funding ratios will likely weaken given continued loan growth and deposit outflows (amid rising interest rates and quantitative tightening), but liquidity will likely remain adequate....

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