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April 26
Two of the more troubled regional banks of recent years predicted Tuesday that credit pressures will abate, but the forecast was greeted by a fair amount of skepticism.
Regions Financial Corp. reported a continued slowdown in credit costs, projecting that the second quarter may be its peak for problem loans and building reserves. Marshall & Ilsley Corp. said it could end nearly two years of losses by yearend after substantially stanching losses during the first quarter.
Christopher Marinac, an analyst at FIG Partners LLC, was among those who said it is premature to count on the economy to remedy credit woes. "This is a very delicate time in the economy to give" banks the benefit of the doubt on credit, he said.
"The economy has not given us any indications that the coast is clear," Marinac added. "We haven't seen job growth materially change and we haven't seen regional GDP growth strong enough to justify" an improved outlook. "It is important for banks not to overstate the situation."
O.B. Grayson Hall, on his first quarterly conference call as Regions' chief executive, expressed optimism over credit. "A lot of the surprises are behind us," he said. Assuming "modest economic growth," Hall said nonperforming assets and net chargeoffs may peak this quarter, though the rate that credit improves will be determined by the overall strength of the recovery.
Mark Furlong, M&I's chief executive, said during the $56.6 billion-asset company's call that if "favorable trends" such as falling nonperforming loans and lower early-stage delinquencies hold steady, the company could stop adding to reserves this quarter and potentially start drawing them down in the third quarter.
"There is a chance we can cross over to profitability toward the end of the year," added Greg Smith, the company's chief financial officer. If not 2010, he said, M&I should return to the black next year.
Al Savastano at Macquarie Research also said it was too early to say credit issues are almost over. Regions' Hall "really put his neck on the line" by forecasting a peak so soon. "He hasn't given the Street any reason to doubt him … but we won't be able to tell if there really is a peak until the third quarter."
Another question mark: M&I's credit costs have swung wildly in the last two years, rising and dipping from quarter to quarter due to heavy loan sales (or the lack of them). Smith suggested that things are finally smoothing out. Falling credit costs helped the company narrow its quarterly loss to $140.5 million from $259.5 million a quarter earlier.
Regions also remained unprofitable in the first quarter, losing $255 million, or 21 cents a share.
Regions' optimism was tempered by credit that continued to deteriorate compared with a quarter earlier, though at a slower pace. Nonperforming assets rose 5.4% from the fourth quarter, to $4.3 billion. Net chargeoffs edged up 1.1% from a quarter earlier, to $700 million.
Regions executives countered during their call by pointing to several metrics that favored an emerging, positive view. The loan-loss provision fell 35% from the fourth quarter, to $770 million. Troubled debt restructurings also fell as more loans were removed after performing under new terms for six months.
William Wells, Regions' chief credit officer, said the $137.2 billion-asset Birmingham, Ala., company will continue to reduce nonperforming assets through loan sales and restructurings. Regions either sold or moved to held for sale $689 million in loans during the first quarter, its biggest move since the fourth quarter of 2008. Loan sales improved during the quarter, going on average for 77 cents on the dollar, compared with 71 cents in the fourth quarter, he said.
Regions wants to reduce its investor real estate book, long viewed by analysts as a problem area. The portfolio shrank 6% during the first quarter, to 23% of total loans. Hall said the goal in coming quarters is to reduce that to 15%, by letting such loans run off and replacing them with loans in areas such as asset-based lending and auto lending.
Growing loans may prove difficult for Regions and other banks in the short term. Total loans fell 3% from the fourth quarter, to $88.1 billion, with declines across all major loan types. Hall was hopeful that commercial line use has stabilized, though at 40.7%, use remains at historical lows.
As Regions has struggled in the Southeast, M&I has been among the more troubled Midwest banks, charging off nearly $4 billion of bad loans — most real estate-related — in the last nine quarters. M&I said its biggest headache — construction and development loans in Florida and Arizona — has largely been contained. Furlong said losses in those portfolios should continue declining over the rest of 2010.
By several measures, M&I had its best showing on the credit-quality front in some time. Nonperforming loans fell for the third straight quarter, to their lowest level in a year, as its new past-due loans were the lowest since the third quarter of 2008. Chargeoffs also fell to their lowest level in a year after rising last quarter. That helped bring down provisions down to their lowest level since mid-2008 as well.
Though the dollar amount of foreclosed property rose for the second straight quarter, M&I said rising real estate prices mean that it is not taking as heavy marks on those assets.
Analysts for the most part were impressed with the M&I credit-quality gains. Robert Patten at a Regions unit, Morgan Keegan & Co. Inc., said in a note to clients that the "results showed clear improvement."
David George, an analyst at Robert W. Baird & Co., said M&I's credit trends were "modestly better than expected" as things "continued to move in the right direction."
M&I indicated that credit quality would remain its most-pressing issue, and that it would shift its attention toward growing profits as losses continued easing. Loan growth isn't really on the table right now, as the company continues to shrink its construction portfolio and as demand remains tepid in commercial lending. Executives reiterated that they are not that interested in pursuing failed-bank deals at the moment and that they are not angling to return the $1.7 billion the bank received in the federal bailout program.
"As our credit-quality trends continue to stabilize and improve, our intention will increasingly shift to rebuilding a profitability profile," Smith said.
Hall was equally reluctant to commit to acquisitions at Regions. "We obviously look at those kinds of opportunities strategically, but quite frankly and candidly, our focus is on returning this institution to a position of sustainable profitability," he said.
