By Manya Saini

(Reuters) -Several U.S. mid-sized and regional banks reported a fall in their second-quarter profit, as income from charging customers interest was squeezed by higher deposit costs and tepid demand for loans.

Most U.S. banks are expecting a decline in net interest income (NII) this year as high interest rates have impeded loan activity, while efforts to retain customers have pushed up deposit costs.

“High interest rates, an uncertain economic outlook and alternative financing challenge continue softening demand for traditional bank lending,” said Chris Stanley, banking industry practice lead, Moody’s.

“Banks of all sizes must critically examine growth assumptions amid these conditions,” Stanley added.

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 the industry for the third straight quarter.

Huntington Bancshares, Fifth Third Bancorp, Regions Financial and Comerica joined rivals in reporting lower second-quarter profit on Friday.

Shares in Fifth Third fell 1.5% before the bell, while Regions and Comerica declined 3% and 11%, respectively.

Several banking executives have said they were actively working to lower expenses to counter interest income headwinds.

Lenders’ loan books are also under investor scrutiny since turmoil at New York Community Bancorp earlier this year and more recently at First Foundation put the spotlight on stress in the commercial real estate sector, particularly office and multi-family portfolios.

CRE pressures and weakening consumer health amid higher rates have also prompted banks to build up their allowances for credit losses or the buffer of capital lenders put aside to cover potential loan defaults.

The U.S. Federal Reserve’s stress test also showed that banks’ credit card loans and corporate credit portfolios could be tricky.

Earnings from NYCB and First Foundation late next week will round-out what has so far been a dull second quarter for smaller lenders.

(Reporting by Manya Saini, Pritam Biswas, and Arasu Kannagi Basil in Bengaluru; Editing by Shilpi Majumdar)

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