Regional Lenders Are Getting Smaller to Stay Afloat

America’s regional banks are reportedly hoping to get healthier by getting smaller.

As The Wall Street Journal (WSJ) reported Monday (Oct. 23), these lenders are scaling back following a quarter that saw banks like KeyCorp, Truist and Citizens Financial record double-digit declines in profit.

For example, PNC is planning layoffs, while Citizens has said it would end its auto loan business and pare down its mortgage operations.

“When deposits are more dear and they’re more costly, then you say, well, I really don’t want to be funding that,” Citizens CEO Bruce Van Saun told The WSJ.

As the WSJ noted, the Federal Reserve has hiked interest rates 11 times since last year to control inflation. Though higher rates typically let banks charge more for loans, the rapid pace of these increases have made it tougher for lenders to get and hold deposits. These rates have also cut into the value of banks’ bond purchases.

“Bank balance sheets weren’t built for that,” said Tom Michaud, CEO at Keefe, Bruyette & Woods, an arm of investment bank Stifel Financial. Banks, he added, will “have to have a franchise that can operate in this environment … and if they don’t, they’re likely to find a partner.”

These partnerships were already happening, PYMNTS wrote earlier this year, as banks faced increased pressure to work with FinTechs amid an ongoing digital shift.

“It’s a reevaluation of the question of build versus buy versus partner,” Igor Bazay, head of finance at Enigma said in an interview here in April.

“[W]hat this environment shows is that partnerships should be a part of that conversation to an extent that they were less so in the last couple of years,” he added.

PYMNTS Intelligence in “The FinTech-Bank Relationship Shifts Toward Collaboration” showed that 65% of banks and credit unions have launched at least one FinTech partnership in the past three years, with a little more than three-quarter of banks seeing FinTech partnerships as crucial to meeting customer expectations.

Meanwhile, larger banks aren’t immune to the current economic climate either. As noted here last week, five of the country’s biggest banks have been quietly cutting jobs all year, with 20,000 positions eliminated during this year.

“Banks are cutting costs where they can because things are really uncertain next year,” Chris Marinac, research director at Janney Montgomery Scott, told CNBC.