Nov 15 (Reuters) - Rating agency Fitch said on Wednesday that U.S. regional banks will face continued challenges in 2024, with those lacking scale or focused on commercial loan growth disproportionately pressured.

"Regional banks lacking in scale will be disproportionately pressured to reduce cost bases and optimize loan composition," Fitch said on Wednesday, adding this would "diminish their ratings headroom, leaving larger players relatively well-positioned to continue to gain market share."

Fitch said that a delay in meaningful loosening of monetary policy would likely translate into "sustained competition for deposits" and "stubbornly weak loan growth." Since March 2022, the Fed has raised its policy rate by 525 basis points to the current 5.25%-5.50% range to fight inflation.

Large regional banks focused on commercial loan growth saw the weakest credit demand, which in some cases reached double digit declines on an annualized basis, Fitch said.

The regional banking sector was in turmoil in the spring as Silicon Valley Bank (SVB) abruptly collapsed after grappling with large amounts of unrealized losses spurred by rapidly rising interest rates. Depositors fled SVB within days after it appeared the firm was in trouble, precipitating its abrupt closure.

In third quarter earnings, a string of regional banks reported pressure on net interest income (NII), the difference between what banks earn from lending and pay out on deposits, which hit some of their shares. Famed bond investor Bill Gross said earlier this month that the danger in investing in them had passed.

Commercial and industrial loans declined a second straight quarter after peaking on March 15 immediately after SVB's failure, totaling $2.75 trillion at the end of September according to Federal Reserve data.

Fitch's caution follows Moody's last week saying that the banking sector is not yet out of the woods, with reinflation a risk if banks fail to sufficiently predict rate moves.

Reporting by Pritam Biswas in Bengaluru and Megan Davies in New York; Editing by Shounak Dasgupta, Jonathan Oatis and Cynthia Osterman

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