Jan 18 (Reuters) - Several U.S. banks reported a plunge in fourth-quarter profits on Thursday, hurt by a drop in interest income and charges tied to replenishing a deposit insurance fund.

Higher payouts on deposits to retain customers from chasing high-yielding alternatives have resulted in an industry-wide contraction in net interest margins for the banks that had until recently benefited from the U.S. Federal Reserve's rate hikes.

Potential Fed rate cuts this year will likely further dent margins this year, some banks have warned.

Meanwhile, most U.S. banks are also paying regulator Federal Deposit Insurance Corporation (FDIC) a fee to refill its insurance fund, used to safeguard customer deposits in case of bank failures, after it was drained of roughly $16 billion following the collapse of two mid-sized lenders in 2023.

DEPOSIT COST CONCERNS STAND FRONT AND CENTER

Investors are closely montoring deposit cost trends in bank earnings reports this quarter. Reuters reported earlier this month that analysts fear 2024 earnings per share at 11 U.S. regional banks will drop from a year earlier, mostly due to increased deposit costs.

Shares of Keycorp fell about 2% in premarket trading after the company posted a near 92% plunge in quarterly profit and forecast a 2%-5% drop in its net interest income (NII) in 2024.

M&T Bank's profit plummeted 37% due to higher deposit costs and the special assessment fee.

One-time charges that pushed up non-interest expenses to $6.5 billion and weaker NII led to Truist swinging to a loss from profit a year earlier, while asset and wealth manager Northern Trust's profit fell 27%.

Digital banking and payments services firm Discover Financial reported a 62% drop in profit on Wednesday, due to bigger provisions for potentially sour loans.

Its shares fell 11% in premarket trading and were set to open at their lowest in more than a month. They also dragged down peers Capital One Financial and Synchrony Financial , which fell over 2% each.

(Reporting by Manya Saini and Niket Nishant in Bengaluru; Additional reporting by Sri Hari N S, Pritam Biswas, Arasu Kannagi Basil; Editing by Shinjini Ganguli)