From crisis to recovery: How regional banks are tackling liquidity issues

An analysis of the earnings calls from the last quarter of 2023 and the first quarter of 2024 shows a persistent difficulty in securing deposit funding and a growing dependence on selling loans and exiting portfolios to improve balance sheets.

25% 
YoY increase in large time deposits

4.7%
Increase in loan to deposit ratio from Jan 2023 

One year on, how has the landscape changed

In the aftermath of the 2023 liquidity crisis, which saw several regional banks falter due to mismanagement of their liquidity positions, the banking sector has been under intense scrutiny. The crisis underscored the importance of robust liquidity management and operational efficiency. As we delve into the regional bank earnings call transcripts from the end of 2023 and first quarter of 2024, several themes and shifts in strategy emerge, highlighting the industry's response to these unprecedented challenges.
 

The looming shadow of liquidity constraints

Persisting challenges with core funding

Recent H.8 data confirms the narrative heard on many of the earnings calls this quarter, banks are continuing to rely heavily on borrowings and large time deposits. points towards persisting constraints in the liquidity environment, which will endure with a hawkish FED.

Figure 1. H.8 commercial banks in the US, Apr 26, 2024. Linked period YoY % change

Mix shift

The data also indicates a significant shift in deposit types, with a rise in large time deposits and a decline in other deposit categories. This mix shift in deposit portfolios reflects banks' challenges in fostering stable deposit growth amidst tightening liquidity.

Figure 2. H.8 commercial banks in the US for Apr 26, 2024.

Strategic responses: Focusing on what you can control

An analysis of the discussions had so far this year with equity analysts shows two primary tactics that institutions are deploying to strengthen their capital and liquidity positions: focused expense reductions and strategic loan sales. Through a careful balance of operational streamlining and thoughtful portfolio optimization, banks are buttressing their financial statements and building resiliency in an uncertain economic environment. Several examples stood out from the last several weeks.
 

Expense discipline

• Regions Financial Corporation: Reported a 6% improvement in their adjusted quarterly efficiency ratio to 60.1%, reflecting improvements in operating efficiency and expense control.
• Truist Financial Corporation: Reported progress on their organization simplification plan, which included reducing headcount and realigning significant elements of their organizational structure. The cost saving initiative announced in September has a goal to eliminate or avoid expenses of approximately $750 million over a 12- to 18-month period, which would help them manage their expense growth in 2024 to flat to up 1%.
• Synovus: The bank mentioned that they took prudent expense rationalization actions that would still allow them to invest for infrastructure needs and future growth, highlighting that adjusted employment expense was down 4% sequentially and year-over-year, driven by headcount reductions during the fourth quarter.
• Zions Bank: The bank reported that their adjusted expenses increased by less than 1%, linked quarter, and decreased by 4% on a year-over-year basis. They are fully committed to delivering their expense objectives in 2024, which should result in adjusted expenses remaining approximately flat in 2024 versus 2023.
   

Rationalizing exposure

• Banc of California: The bank mentioned that they sold approximately 6 billion of assets and paid down approximately 9 billion of wholesale funding. They also discussed retaining a portion of their multifamily portfolio rather than selling the entire portfolio as originally planned.
• Cadence Bank: The bank reported a significant loss on securities restructure, which could imply some form of asset sale or portfolio adjustment.
• Truist Financial Corporation: announced the sale of their remaining stake in Truist Insurance Holdings, expected to close in the second quarter.
• Trustmark: Sold their insurance agency, Fisher Brown Bottrell Insurance to Marsh McLennan Agency in a cash transaction valued at $345 million. Saying, “We are extremely proud of the insurance brokerage business that we have built over the past 20-plus years at Trustmark. FBBI is in the top five largest bank affiliated agencies in the country. It has produced consistent organic revenue and profitability growth over the years, especially the last 10-plus years. The transaction multiples prove what we've known for some time, that we have a very valuable and well-regarded franchise.”
• Webster Financial Corp: Transferred $240 million of payroll finance and factoring loans to held for sale to exit that business, and will pursue “proactive, selective and opportunistic loan sales”…“particularly if the interest rate environment moderates as we head into 2025.”
• New York Community Bancorp: is considering a sale or runoff of nonstrategic assets, saying “We continue to look at the portfolio of assets on the balance sheet and have started a process within the organization where we're reviewing that. And we do have -- and we have identified an opportunity that could close quickly for $5 billion at par minus a transaction fee that we believe could close within a 60- to 70-day period.”
• Valley National Bancorp: saw total loans decline nearly $300 million during the first quarter of 2024 through the participation of certain commercial real estate and construction loans and the sale of our commercial premium finance business, with ~190mm of additional runoff expected over the next year.
   

Looking ahead

With Powell and the Federal Reserve's hawkish stance on interest rates, it is clear that the liquidity landscape will remain challenging for banks throughout 2024. The Fed's commitment to curbing inflation through higher for longer interest rates, to combat persistent inflation, will require financial institutions to continue to responding by focusing on operational efficiency and strategic portfolio management.