Prosperity Bancshares (PB), Truist Financial (TFC), and other regional and super-regional banks are expected to see lower profitability in 2027 due to increased deposit costs and expenses, Morgan Stanley said in a Monday note.

Morgan Stanley analysts project banks' deposit costs to rise in the second half of 2026 due to cyclical factors, with the forward curve pricing in a full interest-rate hike by Q4 2026, front-end rates increasing by about 40 basis points in Q2, and more volatility likely due to less forward guidance from the Federal Reserve.

Deposit competition has been picking up more meaningfully in markets such as the Southeast, Texas, and the Midwest US, where promotional certificate of deposit rates are currently higher by 10 to 45 basis points compared to the Northeast, and will likely increase in the medium term, according to the note.

Morgan Stanley is reducing 2027 EPS estimates by around 1% across the super-regional and regional bank groups.

Banks in the firm's coverage with the highest percentage of deposits in markets with five or more large banks expanding are Cullen/Frost Bankers (CFR), Bank OZK (OZK), Prosperity Bancshares, Regions Financial (RF), and Truist Financial.

Due to the Texas and Southeast markets facing the most competition, the brokerage downgraded the stock ratings of Prosperity Bancshares and Truist Financial to equal-weight from overweight and reiterated the underweight rating of Cullen/Frost Bankers.

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