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July 28
Three healthy regional banks offered a revenue-starved industry a reminder on Wednesday that there is money in lending.
Increased credit to health care providers, manufacturers and other corporate borrowers helped buoy second-quarter results at U.S. Bancorp, PNC Financial Services Group Inc. and M&T Bank Corp.
New loans were not the main driver of higher profits — setting aside less money to deal with old, bad ones was. But rising corporate loan balances helped bolster margins and other important parts of the balance sheet. They also offered hints of the rewards to come for banks with the wherewithal to offer low rates or otherwise attract business clients in a down economy.
Richard K. Davis, chief executive of U.S. Bancorp, said banks that want to survive have no choice but to woo corporate customers today, even if that means fighting hard for customers that are not quite ready to borrow.
"This economy will eventually come back, and it will be corporate-led, not consumer-led, which is unusual," he said in a conference call with analysts on Wednesday. "I actually think that is a reflection of what you're seeing in the strong banks' balance sheets."
Businesses are committing to new credit lines without drawing them down yet, he said, so commercial loan balances have been increasing slightly while utilization rates remain flat.
Today's banking climate is "a matter of just who can hang on the longest" before corporate demand for loans and services picks up followed by consumer demand, he said.
"We're blessed with this corporate trust and payments business," Davis said. "Those of us that have diversified earnings and strong customer bases I think can hold on for quite a while longer and still make money until" the economy turns.
U.S. Bancorp succeeded in making more money in April to June in part by adding $2.2 billion more commercial loans and business property mortgages to health care providers, government bodies and companies doing mergers.
The two commercial-related portfolios were up around 3%, quarter to quarter, at the Minneapolis company. Home mortgages were also up about 3%, or $1 billion.
Those extra assets delivered numerous benefits. They offset runoff of construction and credit card loans — keeping overall loans flat at around $199 billion. The steady pool of loans in turn helped boost net interest income and sustained its net interest margin, which narrowed slightly.
U.S. Bancorp earned $1.2 billion on $4.7 billion of revenue.
New loans to retailers, manufacturers, service providers and other business borrowers kept PNC's revenue from plummeting in the quarter.
It earned $912 million on $3.6 billion of revenue.
Revenue was down less than 1% in the previous quarter even as purging securities and distressed real estate loans sapped net interest income. Offsetting those stresses were cheaper borrowing costs as well as booking more higher-yielding business loans.
Loan income increased for the first time in at least a year, as did loan yields.
The Pittsburgh company's total loans were flat, quarter to quarter, at $150 billion, while modest commercial lending increases offset a small decline in consumer lending. There were pockets of notable commercial growth: manufacturing lending (up 6%), financial services (up 4%) and health care (up 8%).
"Based on our success in adding clients and improved demand, we saw strong commercial loan growth of $2 billion in the quarter," James Rohr, PNC's chairman and chief executive, said in a conference call with analysts Wednesday.
He said pricing "pressure is not increasing right now" despite rising during the first six months of the year. Loan "structures have remained sensible," Rohr said.
Richard Johnson, PNC's chief financial officer, said the company should show year-over-year loan growth in the second half of 2011, with corporate lending on the rise, and consumer and unwanted business property loan runoff flattening out.
The commercial business is benefiting from "very good customer growth" with expectations of adding 1,000 new corporate banking clients throughout 2011, Johnson said.
M&T Bank Corp., of Buffalo, N.Y., posted sharply higher profits that reflected its purchase of Wilmington Trust Corp. of Delaware in the quarter. It earned $322 million on $1.2 billion in fee and interest income.
M&T said it continued increasing loans to business and other types of borrowers across the Eastern U.S. Average loans in the quarter grew at an annualized rate of 2%, excluding gains from buying Wilmington.
Rene Jones, M&T's executive vice president and CFO, said demand and pricing were not impediments to business loan growth.
"Commercial loan demand is good, considering the overall state of the economy," he said. Though "pricing is pretty competitive," the volume of credits that came before its lending committee "interestingly enough" had "slightly higher margins than last quarter."
Robert Barba contributed to this story.
