Regional banks are preparing for a looming economic downturn, but they don't seem too concerned that their balance sheets will take a major hit.
At an industry conference Thursday, executives at PNC Financial Services Group, Regions Financial and M&T Bank said they're not yet seeing large signs of trouble among their customers. They also expressed confidence that their loan books can withstand a downturn, saying that their reserves will protect against more worrying scenarios.
"We don't see crisis-type things in front of us right now," Robert Reilly, chief financial officer at Pittsburgh-based PNC, said at the BancAnalysts Association of Boston conference. "But there are going to be stresses and strains. Absolutely."
The relatively upbeat tone comes as clouds continue hovering over the global economy, with inflation near 40-year highs and the Federal Reserve aggressively raising interest rates to combat it. The Fed's actions
The bankers who spoke Thursday do foresee rising losses in their loan books in the coming months, but they described the trend as normalization after a long period of unusually good credit performance during the pandemic. A strong economy, stimulus funds and increased savings buffers among consumers and businesses have been helping to keep credit losses at historic lows.
Executives at Regions said the Birmingham, Alabama-based bank's credit quality has been "outstanding" so far this year. Net charge-offs made up just 0.46% of the bank's loans in the third quarter, and while the executives cautioned that the figure will migrate upward, they said the jump should be limited.
"We're going to get to normalization over time, but we don't think there's a runaway train here," said David Turner, the chief financial officer at Regions, pointing to the "power and the strength" of business and consumer balance sheets.
Darren King, the CFO at Buffalo, New York-based M&T, said there are "little pockets and pieces" of credit concerns, but nothing that is widespread. It's unclear whether the economy is in a recession, he added, given that the U.S. unemployment rate was at 3.5% in September.
"I don't feel it yet, and we don't see it in the numbers yet," King said at the conference.
In the commercial real estate market, credit metrics for hotels and retail properties have improved significantly after those sectors felt pain early in the pandemic, King said. Health care properties have been "a little bit of a challenge," partly because labor shortages have been limiting their operations and cash flows, he added.
M&T is also keeping an eye on how office properties fare as leases renew and reflect the changed environment of remote or hybrid work, King said.
Since many leases run five to 10 years,
Like the regional bankers who presented Thursday, a Citigroup executive said that the New York megabank is prepared for whatever economic challenges are ahead. Echoing
Citi's strong balance sheet — its capital level, liquidity resources, good credit quality and $18 billion of reserves — is helping, he said.
"It's going to be hard to determine exactly what plays out and how it sequences," Verdeschi said at the conference. "But … from a firm perspective, we're in really good shape."
The "jury's still out on how bad" the credit environment will get, but investors are generally relatively bearish about the outlook, Michael Rose, a bank analyst at Raymond James, said in an interview. The KBW Nasdaq Bank Index is down 25% this year.
Banks' balance sheets are "much stronger" than they were before the 2008 financial crisis, added Raymond James analyst David Feaster. The risks today are more centered around quarterly profits — where higher loan charge-offs and bigger credit loss provisions can take a bite — than the existential risk of running out of capital.
Regions' Turner highlighted that point at the conference, noting that the company has "plenty of capital, even in the severest" economic scenarios.
"Clearly, there would be some impacts in earnings, but not from a capital standpoint," he said.
Jordan Stutts, Allissa Kline and Kevin Wack contributed to this report.
