(Adds share movement in paragraph 3, analyst comment in

paragraphs 4 and 5, graphic on banking index)

    By Manya Saini and Jaiveer Shekhawat

       April 19 (Reuters) - U.S. mid-sized banks' profits would

remain under pressure for most of 2024, Wall Street analysts

said, as higher deposit costs and muted loan growth drag their

earnings.

    Regions Financial RF.N, Huntington Bancshares HBAN.O and

Fifth Third Bancorp FITB.O joined peers in reporting smaller

first-quarter profits on Friday, due to a steep fall in their

interest income.

    Shares of Regions Financial and Huntington fell 1.7% and

0.6%, respectively, in morning trading, while Fifth Third gained

4% on first-quarter earnings beat.

    Net interest margin, a key measure of banking profitability

that takes into account earnings from interest on loans and

payments on deposits, also contracted across regional lenders

for the second straight quarter.

    "2024 could be troublesome for small to medium-sized banks

in the U.S.," said Dan Coatsworth, investment analyst at AJ

Bell, citing fierce competition for deposits between lenders,

the state of the economy and weakening loan growth.

    "Larger banks have an advantage... as they are perceived to

be safer and often provide a broader range of services."  

    Most mid-sized U.S. banks are expecting a decline in net

interest income (NII) this year, as elevated interest rates have

stymied loan activity while efforts to retain customers from

chasing better returns elsewhere have pushed up deposit costs.

    "I think we've got another quarter of down in net interest

income to get through before we see some recovery in the second

half and this higher-for-longer is kind of a double edged sword

for banks in terms of interest rates," said Stephen Biggar,

analyst at Argus Research.

    "We need to see a downward trajectory in rates to see

improvement in loan growth."  

    On Friday, Regions Financial, Fifth Third Bancorp and

Huntington Bancshares kept their outlook for 2024 interest

income decline unchanged.

    Rival U.S. Bancorp USB.N cut its forecast for full-year

interest income, while KeyCorp KEY.N and Comerica CMA.N

maintained their outlooks, when they reported lower

first-quarter profits earlier this week.

    "The broader higher-for-longer rate environment will

continue to challenge net interest income for regional banks,

with some institutions facing declines due to higher funding

costs or changes in deposit mix and pricing," said Theresa

Paiz-Fredel, senior director, Fitch Ratings.  

    Hotter-than-expected inflation has raised fears of borrowing

costs staying higher for longer, which has pushed borrowers on

the sidelines and discouraged them from taking out long-term

debt such as home mortgages.

    "Loan growth remains very weak," analysts at Piper Sandler

said in a note earlier this week. The brokerage added that total

industry loans grew just 2.2% in the second week of April.

    Last week, strong economic data led to analysts pushing back

rate-cut expectations to the back half of the year, further

clouding the outlook for a meaningful recovery in the mortgage

market.

    Several banking executives have said they were actively

working to lower expenses to counter interest income headwinds.

    The pressure on profits has also been a drag on industry

stocks. The KBW Regional Banking Index .KRX, which tracks a

basket of major U.S. regional lenders, has fallen 14.2% this

year, underperforming the benchmark S&P 500's .SPX 5% gain.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

U.S. mid-sized lenders' Q1 net interest margins contract    https://reut.rs/4aFUdYG

Regional bank stocks miss broader Wall Street rally    https://reut.rs/3VZanYC

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(Reporting by Manya Saini and Jaiveer Singh Shekhawat in

Bengaluru; Additional reporting by Arasu Kannagi Basil and

Tatiana Bautzer; Editing by Shinjini Ganguli)

((ArasuKannagi.Basil@thomsonreuters.com;))