Charles Schwab, US Bancorp and Citizens Financial reported fourth-quarter results ahead of the opening bell Wednesday as the regional banks cap off a tough year.

"We've seen continued pressure on deposits, continued pressure on liquidity, and really a reminder that higher for longer rate environment is here," S&P's Nathan Stovall told Yahoo Finance Live.

Stovall added: "Wall Street has been very concerned about the group's exposure to commercial real estate in particular, but thus far we really haven't seen anything that would look any different than, call it normalization in credit trends. Because remember, the group's really been over-earning on credit... they've had very little lost content in the form of charge-offs activity, and provisions have been historically low."

Shares of Charles Schwab led the decline for regional banks after disclosing net new assets fell 48% on the year, short of Wall Street expectations.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino.

Video Transcript

BRAD SMITH: Nathan, on aggregates, the provisions for loan losses or credit losses-- that certainly come up a few times at this point during the early moments of the earnings season, especially as we focus in on banks, big banks last week, regional banks this week. How does that have perhaps a more profound impact on some of the regional banks, though?

NATHAN STOVALL: Sure, I mean that's the area that is really in focus. The Street has been very concerned about their exposure to commercial real estate, and in particular-- but thus far, we really haven't seen anything that would look any different than call it normalization and credit trends.

Because remember, the group's really been over earning on credit. And what I mean by that is they've had very little loss content and formal charge-offs activity, and provisions have been historically low. And you're seeing both come up, but come off of such low basis.

And we haven't really heard anybody say anything that is really worrying. They're still in that normalization camp, moving back towards call it pre-pandemic levels, the consumer remains resilient. And the CRE piece is definitely one that we're watching really closely, but it's going to take a while. It's not going to be one quarter or even two quarters, it's going to be sort of a multi-year shift. And I think the Street still hasn't quite fully appreciated that, particularly when you look at the regionals.

The other thing I would say, too, when you look at their exposures, you need to have a little bit more nuance in assuming that everything is an office skyscraper. They might be some specific different subcategories within that asset class that will perform way differently. And you even have some stuff that might even be office loans that have regional holds that has nothing to do about a return to work conversation, if you're talking about local medical, like a dentist's office or even a doctor's office.

SEANA SMITH: Nathan, as we've moved past some of the current challenges, some of the current headwinds in the market-- and as we look further ahead down the road, there is, of course, what the impact is going to be on some of the higher credit costs and the impact that that is going to have specifically on some of these regional players. What is that going to look like in terms of the pressure that we could see on earnings? And is it going to be-- are some of these banks going to be able to weather what could be a pretty tumultuous couple of quarters there for them?

NATHAN STOVALL: Sure. And we do have that expectation that you're going to see notably higher credit costs, both in the form of higher charge-off activity and banks continuing to build reserves. But we think it's a manageable pit broadly. And it's a headwind earnings. And so it's really an earnings discussion rather than a safety and soundness discussion for the vast majority of institutions.

I think you might have some outliers there. That could absolutely happen. And you'll have some that don't perform as well. But broadly speaking, we think this is more akin to a modest downturn than anything really severe. And it will just play out over time.

The other thing I would say is when you look at the valuations of the sector, yes, they've ripped up in December off of the lows that we saw earlier in '23, but they're still historically cheap relative to the S&P 500. So some of that deterioration, you could say, is already baked into the valuation.