Regions plans to outlast deposit runoff without tapping wholesale funding

Regions Bank

Regions Financial expects to lose up to another $5 billion in deposits in the early part of this year if the Federal Reserve continues with interest rate hikes. 

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% decline from the same period a year earlier. Regions Chief Financial Officer David Jackson Turner cited deposit repricing in response to the Fed's rate hikes for driving the runoff.

But Turner did not expect the $155 billion-asset bank to need to turn to wholesale funding to make up for the 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 growth in the balance sheet without the need for material wholesale borrowings in the near term," Turner told analysts on Friday during the fourth-quarter earnings presentation. 

"We expect to experience stabilization of deposit balances mid-year, with the potential for modest growth in the second half of the year," he added.

Deposit runoff has most impacted corporate banking, which reported a 13% decline compared to the same period last year. Turner noted that Regions had lost up to $3 billion worth of corporate deposits as these customers went "to seek higher rates that we weren't willing to pay" for their excess cash.  

But he added that Regions still maintained these business's operating accounts. That means the bank could always seek out deposits from these corporate customers before turning to wholesale funding if the need arises. Using short-term debt was an option as well, Turner said. 

"We'll just have to evaluate the total cost of all of our opportunities at that time, which as far as I said earlier, is really going to be in the second half of the year," he said during the earnings call. 

Besides the decline in corporate banking,  noninterest-bearing deposits, fell 12%, a trend that should continue in 2023.

"We experienced remixing away from noninterest-bearing deposits to other options both on and off balance sheet, including those offered throughout Treasury Management platform," Turner said.

Regions caps off a week of earnings presentations in which many banks have reported lower deposit levels and faced questions about future sources of funding.

While Bank of America reported a $6.2 billion decline in consumer banking deposits compared to the year-ago period, M&T Bancorp said it plans to issue up to $4 billion in senior debt to offset an expected deposit shortfall.

Meanwhile, Comerica Chief Financial Officer James Herzog said that declines were "better than we expected" and sees signs that cost pressures could ease this year.

As deposits decline amid the Fed's rate hikes, net interest income is expected to continue to grow, though at a slower pace than last year. Regions reported $1.4 billion of net interest income, a 32% increase from the year-ago period. Management expects net interest income to increase between 13% and 14% in 2023. 

"Growth in net interest income is expected to continue until the Federal Reserve reaches the end of its tightening cycle," Turner said.

Regions reported a boost in net income, bringing in $685 million during the fourth quarter,  up 56% compared to the same period last year. Overall, the bank generated $2 billion in total revenue, a 22% rise from the same period a year ago, while noninterest expenses of $1 billion fell 3%.

Noninterest income of $600 million fell 2% compared to the year-ago period because of declines in the bank's capital markets and mortgage businesses.

Regions' fourth-quarter earnings per share of $0.70 was above the average estimate of $0.65 from analysts surveyed by FactSet Research Systems.

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