Strategies of Major Regional Banks Amid High Funding Costs and Asset Quality Issues

Impact of High Funding Costs on Financial Performance

High funding costs have led to declines in net interest income for major regional banks, driven by customer migration to higher-yielding deposit products, lower loan balances, and increased deposit costs. Additionally, potential credit rating downgrades could further elevate funding costs, impacting overall financial performance.

"Turning to Slide 4. Net interest income declined $1.1 billion or 8% from a year ago due to the impact of higher interest rates on funding costs, including the impact of customers migrating to higher yielding deposit products as well as lower loan balances, partially offset by higher yields on earning assets." --- (WFC, earning call, 2024/Q1)

"Either of these activities could increase our funding costs. Possible downgrades in our credit ratings or outlook could, among other negative impacts, increase the costs of funding from capital markets." --- (RF, press release, 2024/07/19)

"Revenue of $5.3 billion was up 6% year-on-year, driven by growth in management fees on higher average market levels and strong net inflows, as well as higher brokerage activity, largely offset by deposit margin compression. Expenses of $3.5 billion were up 12% year-on-year, largely driven by higher compensation, primarily revenue-related compensation, and continued growth in our private banking advisor teams." --- (JPM, earning call, 2024/Q2)

"Net interest income of $3.3 billion declined $139 million or 4%, reflecting increased funding costs, lower loan balances, and one less day in the quarter." --- (PNC, earning call, 2024/Q1)

"This decline was driven by higher funding costs, including the impact of lower deposit balances and customers migrating to higher-yielding deposit products in our consumer businesses and higher deposit costs in our commercial businesses as well as lower loan balances." --- (WFC, earning call, 2024/Q2)

Asset Quality Management and Credit Risk Strategies

Major regional banks are focusing on robust risk management, credit underwriting, and maintaining strong risk controls to manage asset quality. They are adjusting allowances for adverse risk migration and credit quality normalization, emphasizing stable credit quality, particularly in stressed portfolios like commercial real estate.

"operating leverage and efficient growth. And then thirdly is doing what we've always done, which is risk management, being good at financial discipline, risk management, credit underwriting." --- (USB, conference, 2024/06/11)

"The increase to our allowance was primarily due to adverse risk migration and continued credit quality normalization, and incrementally higher qualitative adjustments for risk in certain portfolios previously identified as under stress." --- (RF, earning call, 2024/Q1)

"They include growing and deepening relationships with core clients, maintaining our expense discipline, returning capital to our shareholders via share buybacks and our common strong dividend, and enhancing our digital experience through T3, all while maintaining and strengthening strong risk controls and asset quality metrics." --- (TFC, earning call, 2024/Q2)

"And on the credit card side, it's really driven - the increase is really driven by balances. So you've got two very different dynamics going on there with the releases being just representative of a smaller higher credit quality credit portfolio." --- (WFC, earning call, 2024/Q2)

"Third, credit quality remains stable during the quarter. The office portfolio remains an area of focus, but we are adequately reserved overall, and particularly with respect to CRE." --- (PNC, earning call, 2024/Q1)

Capital Allocation Amid Financial Challenges

Major regional banks are adjusting their capital allocation strategies amid financial challenges. JPMorgan Chase is considering regulatory impacts on its strategy, U.S. Bancorp awaits regulatory clarity before finalizing its capital distribution plans, and Bank of America reports a decline in return on allocated capital due to increased capital and lower net income.

"But if this continues and you do continue to see this sort of regulatory push, How does that impact your strategy? How does that impact how you think about capital allocation and just the optimism generally about hitting your financial returns?" --- (JPM, event transcript, 2024/05/20)

"When we finalize when the rules are finalized and we have more clarity in terms of what the capital levels will be, we'll actually then describe our capital allocation or distribution strategy, which will include both dividends and buybacks at some point in time, but we want to just get clarity on the rules." --- (USB, conference, 2024/06/11)

"The return on average allocated capital was 25 percent, down from 30 percent, due to an increase in allocated capital and lower net income." --- (BAC, sec filing, 2024/Q1)

Customer Retention and Acquisition Strategies

Major regional banks are focusing on enhancing customer engagement and satisfaction to drive retention and acquisition. JPMorgan Chase emphasizes strong customer engagement, Wells Fargo improves advisor retention and client service, Bank of America achieves high customer satisfaction and low attrition, U.S. Bancorp expands offices in growth regions, and Regions Financial boosts wealth management relationships.

"While we're adding customers to the franchise at an accelerated pace, we're also seeing strong retention with existing customers and maintaining focus to deliver primary bank and hard against high card spend engagement. So once you're here at Chase, it's all about how we engage with you." --- (JPM, Investor Day, 2024/05/20)

"While we view our work here as a long-term commitment, we expect to see results in the short and medium term and are encouraged by the improved performance we've already seen with strong growth in investment banking fees during the first half of the year. In our Wealth and Investment Management business, we have substantially improved advisor retention and have increased the focus on serving independent advisers and our consumer banking clients, which should ultimately help drive growth." --- (WFC, earning call, 2024/Q2)

"We’ve got customer satisfaction to the highest levels ever, in the mid-80s, top two [indiscernible], etc., attrition down to lowest ever, preferred rewards kicked in, and all that has led to higher and higher balance retention per account, and then also more accounts." --- (BAC, earning call, 2024/Q1)

"That's another benefit. And so partners is one of the strategies. And then thirdly, in our institutional corporate commercial, we can add offices and we're doing that in the Southeast to provide services to those customer bases, which are faster growing and can leverage some of the capabilities that we myself and John talked about." --- (USB, conference, 2024/05/30)

"So the nice growth in that business. Similarly, wealth management is up over 6% year-over-year, which is both reflective of increases in asset valuations and increases in assets held for customers increasing relationships." --- (RF, earning call, 2024/Q1)

Regulatory Compliance and Adaptation

Major regional banks are balancing efficiency with regulatory compliance, as seen in Bank of America's approach. Wells Fargo emphasizes ongoing efforts to meet regulatory expectations, while Truist Financial maintains a liquidity buffer to ensure compliance. JPMorgan Chase highlights the continuous nature of regulatory requirements.

"Then it gives you the opportunity to continue to make those investments. And then at the same time, absolutely, you're constantly looking to make sure that you're running things as efficiently as possible, but not so efficiently that you start to lose out on compliance and on all the regulatory issues." --- (BAC, conference, 2024/05/08)

"While we see clear forward momentum, it's up to our regulators to make their own judgments and decide when the work is done to their satisfaction.Progress has not been easy, but tens of thousands of my partners at Wells Fargo have now worked tirelessly for years to deliver the kind of change necessary for a company of our size and complexity, and we will not rest until we satisfy the expectations of our regulators and the high standards we have set for ourselves.While we have made substantial changes and have meaningfully improved our control environment, the industry operates in a heightened regulatory oversight environment, and we remain at risk of further regulatory actions." --- (WFC, earning call, 2024/Q2)

"And so we obviously have to do compliance and regulatory stuff like that, but it's endless." --- (JPM, conference, 2024/05/29)

"Any additional capital distributions remain subject to the approval of U.S. Bancorp's Board of Directors and compliance with regulatory requirements." --- (USB, press release, 2024/06/28)

"Truist maintains a liquidity buffer of cash on hand and highly liquid unencumbered securities that is sufficient to meet the projected net stressed cash-flow needs and maintain compliance with regulatory requirements." --- (TFC, sec filing, 2024/Q1)

Technological Innovations and Digital Transformation

Major regional banks are leveraging technological innovations and digital transformation to gain strategic advantages. U.S. Bancorp focuses on transforming tech trends, JPMorgan combines traditional banking strengths with fintech agility, and Wells Fargo is increasing investments in modernizing infrastructure and digital capabilities.

"Our innovation execs @donrelyea and @Todderm work to transform #techtrends into strategic advantages for the bank." --- (USB, Twitter post, 2024/04/19)

"And as you can see on the right, we are unique in our ability to combine the safety, scale and resiliency of a global and regulated bank along with the agility and innovation of a fintech." --- (JPM, Investor Day event transcript, 2024/05/20)

"We're spending more money on modernizing our infrastructure. We're spending more money on digital capabilities." --- (WFC, conference transcript, 2024/05/29)

"So all of that activity allows us to turn up with our proposition. And our proposition works on our scale, our reputation in the market, our ability to and the fact that we've done this at scale for some of the largest providers and some of the innovations that we have put in place." --- (BAC, Conference, 2024/05/08)

"Don Relyea, our Chief Innovation Officer, recently sat down with @JimMarous for the 'Banking Transformed' podcast to discuss our innovation journey." --- (USB, Twitter post, 2024/06/28)

Future Outlook and Strategic Plans

Major regional banks like JPMorgan Chase, Wells Fargo, and U.S. Bancorp are maintaining their strategic outlooks despite short-term business cycle changes. They are focusing on organic growth, leveraging excess capital for tactical opportunities, and prioritizing areas like corporate investment banking and card business to drive future profit growth and strategic differentiation.

"I just don't see us fundamentally making strategically different decisions if the strategic outlook is unchanged simply because of the business cycle in the short term. Glenn Schorr: Awesome. Thank you. Jeremy Barnum: Thanks." --- (JPM, earning call, 2024/Q1)

"But as long as our assumptions on spend, balanced growth, and credit continue to play out as expected, we expect the card business to meaningfully contribute to profit growth in the future as the portfolio matures. We have been methodically growing our corporate investment bank, which has been a priority and continues to be a significant opportunity for us." --- (WFC, earning call, 2024/Q2)

"These efforts are positioning us well for continued growth and strategic differentiation. Let me now turn the call over to John, who will provide more detail on the quarter as well as forward-looking guidance." --- (USB, earning call, 2024/Q2)

"Now, let me give you some color on the drivers. With respect to organic business growth, Daniel covered the strategic importance of each of these initiatives in his section and you can see some of the additional details on the page." --- (JPM, Investor Day, 2024/05/20)

"And what he's kind of saying is that in a moment where you're carrying a lot of excess capital sort of for strategic reasons, you have the ability, at least in theory, to deploy portions of that with kind of like into relatively short duration assets or strategies or client opportunities in whatever moment for whatever reason and what might be thought of as a tactical sense." --- (JPM, earning call, 2024/Q1)