Regional banks' earnings and share prices will take a hit as interest rates have fallen to record lows, analysts at Citi Investment Research & Analysis said, cutting their price targets on several lenders, including Wells Fargo & Co (WFC.N).
"A period of prolonged low rates is a very challenging environment for a regional bank, but it is not an immediate hit that will show up in the 2Q results, rather the impact builds over time as the balance sheet turns over," Citi analysts said.
Citi analysts cut their earnings outlook on regional banks by an average of 3 percent for 2013 and 6 percent for 2014.
Earnings could take a hit from increasing pressure on net-interest margins, mainly due to lower reinvestment rates banks will face as legacy loans and securities are repaid or mature, analysts, including Keith Horowitz, wrote in a note to clients.
Banking analyst Horowitz is rated five stars by Thomson Reuters StarMine for the accuracy of his earnings estimates on the companies he covers.
Citi analysts cut their price targets on KeyCorp (KEY.N), Comerica Inc (CMA.N), First Horizon National Corp (FHN.N), Wells Fargo, SunTrust Banks Inc (STI.N), Zions Bancorp (ZION.O), SVB Financial Group (SIVB.O), M&T Bank Corp (MTB.N), PNC Financial Services Group (PNC.N) and First Niagara Financial Group Inc (FNFG.O).
Last week, FBR Capital Markets analyst Paul Miller downgraded several regional banks, including Zions, Huntington Bancshares Inc (HBAN.O) and New York Community Bancorp NYB.N, saying the lenders face increased margin pressure in the near term as interest rates continue to fall.
Shares of Wells Fargo closed at $31.18 on Thursday on the New York Stock Exchange. Comerica shares closed at $28.94, while Zions closed at $18.31.
The KBW Bank index .BKX, which measures the performance of 24 banks, is down 15 percent from its intraday high in March. On Thursday, the index closed at 42.90 points.
(This story was corrected in paragraph 1 to clarify that interest rates have hit record lows)
(Reporting by Rachel Chitra; Editing by Tenzin Pema and Supriya Kurane)