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April 26
The earnings season discussion turned subtly Wednesday to the outlook on — gasp — new lending.
Granted, loan volume across the industry continues to shrink. But based on first-quarter results from companies including Comerica Inc., SunTrust Banks Inc., KeyCorp and Huntington Bancshares Inc., it is contracting at a slower clip.
With credit trends finally on the mend, loan volume has emerged as the next important metric for which banks are reporting decelerating rates of deterioration.
Some executives were more upbeat than others about growth prospects for later in the year.
With a rising number of loans in the pipeline and predictions for modest improvement in the economic environment, Comerica expects low-single-digit growth in loan volume between now and the end of the year.
"The decline in loan outstandings we saw in the fourth quarter of 2009 slowed further in the first quarter of 2010, and the pace of decline moderated in each successive month of the first quarter," said Ralph W. Babb Jr., the Dallas company's chairman and chief executive.
Other companies presented less aggressive outlooks.
Jeffrey Weeden, Key's chief financial officer, said large corporate clients are making do with less bank credit by accessing the capital markets for funding. The Cleveland company also has about $7.2 billion of home building, home equity, recreational vehicle and other types of loans that it still wants to sell or run off from its books.
Average loans at Key fell 4.8% over the course of the first quarter. Nonetheless, the drop was smaller than the 6.6% decline in the previous quarter, a heartening data point for analysts.
Erik Oja, an equity analyst for Standard & Poor's, wrote in a note to clients that S&P was raising its 2010 and 2011 estimates for Key "On our expectations for declining loan-loss provisions and a recovery of loan growth." S&P now projects a per-share loss of 7 cents instead of a 59 cents for 2010, and earnings per share of 26 cents instead of a 5-cent loss for 2011.
New rules requiring certain types of receivables to be brought on to the balance sheet inflated the first-quarter asset figures for several banks. SunTrust said the accounting change artificially enlarged its loan book, which grew 0.3% from the prior quarter, to $114 billion. Absent the added receivables, the portfolio actually shrank 1%. But the trend line still improved, as the rate of contraction slowed from the 2.4% pace of the previous quarter. The portfolio shrank 11% compared with a year earlier.
"We are hopeful that borrowing by creditworthy clients will stabilize soon and pick back up in the second half of the year," SunTrust CFO Mark Chancy told analysts on a conference call. "Our belief at this point is based largely on the slowing pace of client utilization and anecdotal information from dialogue with our clients."
SunTrust is continuing to watch commercial credit line utilization, which declined at a slower rate for corporate clients and stabilized for midsize companies, Chancy said. Corporate clients in the first quarter tapped roughly 21% of available lines, while midsize companies used 33%.
Another constraint on the loan portfolio also was a run-off of loans in "higher-risk categories" such as construction, where balances fell 14% from the fourth quarter, Chancy said.
At Huntington, loan demand has remained tepid but CEO Stephen Steinour said he has heard indications from business clients that they may start borrowing as soon as it seems like the economic recovery is taking hold.
In the meantime, Steinour said, business and consumers are still deleveraging, which was reflected in the Columbus, Ohio, company's loan volume for the quarter, which was essentially flat at $37 billion — a figure that included $700 million in newly recognized securitized auto loans.
Two portfolios rose modestly, with automobile loans and residential mortgages increasing by about $100 million. But utilization rates on commercial and industrial loans were unchanged from the prior quarter, and commercial real estate loans were charged off and paid down faster than they could be replaced with new ones.
The overall lackluster demand was a letdown because Huntington had set out to go on a lending spree last year after raising fresh capital.
"The disappointment for us is we didn't get the loan growth we expected," Steinour said.
Still, he described the quarter as a "significant" turning point for Huntington, as it returned to profitability faster than expected. Earnings of $39.7 million were buoyed by a $38.2 million delayed tax benefit tied to last year's restructuring of a subprime lending group. But the numbers also reflected dramatic declines in loan-loss provisions and chargeoffs. Huntington also turned a corner on reserves in the quarter, reducing them by about $3 million to $1.53 billion. Steinour said reserves could continue falling for the rest of the year, economic conditions permitting.
SunTrust narrowed its loss to $229 million, compared with losses of $248 million in the fourth quarter and $875 million a year earlier. The Atlanta company lowered its loan-loss provision 12% from the fourth quarter, while nonperforming assets fell 1% and net chargeoffs were little changed.
Key's net loss narrowed to $98 million from $258 million in the prior quarter on lower provisions and chargeoffs and higher net interest margin on cheaper funding costs and higher loan yields. Comerica's loss widened to $71 million from the fourth quarter's $29 million. But excluding dividends paid on fully redeemed preferred shares issued to the Treasury Department under the Capital Purchase Program, the company earned $52 million.
