At Most Big Regional Banks, No Escaping Margin Pinch

A surprising number of banks staved off an expected compression in net interest margins last earnings season.

There won't be as many surprises this time around.

Most of the large regional banks reporting earnings Wednesday and Thursday, including Huntington Bancshares Inc. and PNC Financial Services Group Inc., felt the pinch: though funding costs are about as low as they can go, so are the yields on low-risk securities, and absent a fuller recovery in loan demand, these securities will remain the preferred parking spot for deposit-related liquidity.

"One of the areas of the most pressure on our margin has been the fact that our deposit growth has exceeded loan growth," Donald Kimble, Huntington's chief financial officer, told analysts on the company's fourth-quarter conference call. "Our outlook for next year would assume that loan growth approximates deposit growth, and so we won't have that component of the pressure, prospectively, and then we'll continue to see the improvement in the overall mix."

Huntington's fourth-quarter margin was 3.37%, down 8 basis points from the third quarter.

Fifth Third Bancorp was one of the few large regionals to avert a tightening in its margin, as it repriced another batch of high-cost certificates of deposit that were originated in the second half of 2008. Consumer CDs dropped 17% from the third quarter and 35% from the year earlier. The roll-off of higher-cost CDs, along with a pickup in commercial loan demand, helped bolster its net interest margin by 5 basis points, compared to the third quarter, to 3.75%.

"We still have about $2.5 billion of those CDs, which have rates in excess of 4%, and we expect about $1.5 billion to mature, primarily during the second half of 2011," Fifth Third Chief Financial Officer Dan Poston said on the Cincinnati company's earnings call late Wednesday. He said he expects another 5 basis points to 10 basis points of margin expansion this quarter.

PNC, too, has been repricing CDs in large batches. But the impact on its margin was no match for a combination of soft loan demand, a low-rate environment and a more muted benefit from purchase accounting. The Pittsburgh company had a net interest margin of 3.93%, down from 3.96% in the third quarter and 4.05% the year earlier.

"We had expected it to decline further, to 3.88%," R. Scott Siefers, an analyst at Sandler O'Neill & Partners LP, wrote in a research note. "Given investor concerns about the stability of PNC's reported net interest margin, we view the better-than-expected fourth-quarter performance as a win."

Investors also worried about the margin at U.S. Bancorp, which on Wednesday forecast a contraction tied to plans for securities purchases this year. Barclays Capital analyst Jason Goldberg called that concern "overdone," but he cut his 2011 earnings estimate for the Minneapolis company by 2%, to $2.15 a share, reflecting the assumption of a lower margin.

TCF Financial Corp. also expects its margin to keep narrowing, unless the yield curve steepens much. The Wayzata, Minn., company reported a fourth-quarter margin of 4.04%, down from 4.12% in the previous quarter and 4.07% a year earlier. William Cooper, its chairman and chief executive, said the decline would primarily come from the company's taking on more variable-rate loans than fixed-rate ones.

"We are doing that consciously to make ourselves a little more asset-sensitive because we believe rates will rise again," Cooper said Thursday on a conference call with analysts. But at the same time, he said, the margin is being compressed as loans booked at higher rates get amortized and replaced by newer loans made at much lower rates.