(Reuters) - U.S. lenders' second-quarter profits were squeezed by dampening loan demand and the high interest they paid to hold on to deposits, but a flurry of bond sales boosted their investment banking units.

Citizens Financial, US Bancorp ( USB ), First Horizon ( FHN ) and Synchrony Financial ( SYF ) all paid higher rates compared with a year earlier on their customers' deposits, they said on Wednesday.

The results illustrate the pressure on banks from the Federal Reserve's quantitative tightening that has pushed the benchmark interest rate to its highest since the global financial crisis in 2008.

However, Wall Street operations were a bright spot. Citizens' capital market fees surged 63%, on the back of bond underwriting and loan syndication.

A resilient U.S. economy has encouraged corporate executives to raise capital via bond sales, boosting the fees at investment banks that underwrite such deals.

Even at large banks such as JPMorgan Chase, Citigroup and Bank of America, the investment banking business was lucrative in the second quarter.

The KBW regional banking index hit its highest in over a year and was last up nearly 2%, while the S&P 500 banks index inched up 0.4%.

CRE IN FOCUS

Banks have been facing tough scrutiny from investors over a potential weakness in their commercial real estate loan portfolio.

Problems tied to CRE loans at regional lender New York Community Bancorp and more recently First Foundation have put the spotlight on default risks.

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

Lenders hold a larger share of non-investment grade corporate credit, which are over three times more likely to default than investment grade ones, the Fed said.

On a brighter note, Washington Federal reported better-than-expected third-quarter earnings on Tuesday, nearly a month after it sold $2.8 billion of multi-family loans at no loss.