US bank CEOs warn of geopolitical risks as analysts cite stability

By Lananh Nguyen, Nupur Anand and Pete Schroeder

NEW YORK (Reuters) -U.S. bank CEOs warned a slowing economy and rising geopolitical tension could weigh on earnings, but said the industry had regained its footing after the biggest bank failures since the 2008 financial crisis.

Here are quotes from a conference hosted by The Clearing House in New York:

William Demchak CEO of PNC Financial (NYSE:), on risks to the outlook:

“In the near term, it’s actually the fragility of our Treasury market and the funding of the U.S. government. I think we’ve pushed much of the capital of the large banks who traditionally would play a role in this into unregulated, highly levered, funded through prime brokerage, but we don’t necessarily have a view on how that leverage plays through the system.”

“And if the Fed loses control of the back end of the yield curve as there’s unwinds against those positions one way or the other, I think it’s a disastrous outcome.”

Curtis Farmer, CEO of Comerica (NYSE:) Bank:

“There’s never been a time in my career, when there was so much uncertainty,” including geopolitical tensions and potential cyber attacks from bad actors, he said.

Michael Roberts, CEO of HSBC North America on cyber risks:

“It’s out there, it’s very real … it’s getting more and more sophisticated.” And climate risk “is going to affect us all in ways that we don’t even know.”

Thomas Michaud, CEO of investment bank Keefe, Bruyette & Woods (KBW), on the industry outlook:

“We think the banking industry’s having a 10% decline in profitability … notwithstanding three of the four largest bank failures in American history happening this spring, the industry’s in good shape,” but will have to weather rising loan delinquencies and competition from fintech companies.

Erika Najarian, an analyst at UBS:

“The banks are actually in pretty decent shape … of course they’re less profitable, we’re in the back end of the cycle.”

“Nobody wants to own a lot of bank stocks, whether it’s large cap, mid cap, ahead of a credit crunch, ahead of a recession.”

Manan Gosalia, an analyst at Morgan Stanley:

“For the regional banks specifically, we are at a stage right now where we’re in the worst part of the cycle … We’re likely to see deposit costs rise, cost of funding rise well into 2024, so there are some challenges on the revenue side. It is likely here that loan growth will slow pretty meaningfully.”

Eugene Ludwig, former comptroller of the currency and CEO of Ludwig Advisors, on bank mergers and acquisitions:

For failing banks in a sale process run by the Federal Deposit Insurance Corp., “as long as they have the backstop to get the liquidity back the underlying institution may be very attractive to be acquired …. The more we can get the private sector back in the game, the better off we are.”

Mitch Eitel, managing partner of the financial services group at law firm Sullivan & Cromwell:

“No one is going to touch a failing institution while it’s failing, swoop in, and buy, particularly in our current environment where there are embedded costs that’s on balance sheets that no one can recognize.”

Michaud, CEO of KBW:

“There are a lot of healthier banks, I think, that would look to acquire the banks that have low credit performance. But the length of time it takes to get a merger application approved has doubled in the last two and a half years. And that’s really raised the bar for the willingness of potential acquirers.”

Andy Cecere, CEO of U.S. Bancorp, on the use of artificial intelligence in banking:

“It’s going to be a big deal. I do think that we are all working on use cases and we’re also working with our regulators on those use cases because we want to make sure we’re creating mechanisms and processes that don’t have bad outcomes, bad decisions, bias.”