Loan Growth at Regionals: Cause for Celebration, or Worry?

The third quarter has divided regional banks into two camps.

One group, including PNC Financial (PNC), U.S. Bancorp (USB) and KeyCorp (KEY), reported sizable loan growth and sounded upbeat. Members of the second group, including BB&T (BBT), Fifth Third Bancorp (FITB) and M&T Bank (MTB), are trying to figure out their rivals' math and gave more guarded outlooks.

Total loans at BB&T and Fifth Third increased nominally from the second quarter, and M&T said it was hurt by pricing competition in the Mid-Atlantic. Kelly King, BB&T's chairman and chief executive, cast doubts on other banks' reports of stronger loan growth.

"Frankly, I don't think you could get 3% or 4% [loan growth] in the market," he said during the Winston-Salem, N.C., company's conference call to discuss quarterly results Thursday.

The U.S. economy "is not growing at 2%, so this notion that banks are going to grow faster than [gross domestic product] is kind of an interesting conclusion to reach," King said. "When people talk about their loan growth, I think if you really drill down, most everybody will tell you that 90%-plus of what they're doing is moving around existing business."

Several regional executives last month had warned that loan totals in third and fourth quarters might be disappointing, but several this week reported 5% growth in the third quarter compared with a year earlier. U.S. Bancorp executives spoke positively about fourth-quarter lending, and several assured analysts that they were not taking risks to build market share.

The budget deal in Washington this week could stimulate loan demand, but it is unclear how much, said Kevin Kabat, the vice chairman and CEO of Fifth Third in Cincinnati.

"Borrowers remain cautious and on the sidelines, which ... led to some slowing in loan demand during the [third] quarter," Kabat said. "Our expectation is that we will get a pickup. We are seeing the pipelines fill back again [this quarter], but there is still an awful lot of cautiousness out there. "

BB&T: Tough 4Q Ahead

By and large, BB&T hit a wall in most lending categories during the third quarter. Total loans rose just 0.8% from a year earlier, to $119 billion. Its biggest hit came from residential development loans; that portfolio shrank 7% from the second quarter and 32% from a year earlier, to $982 million.

BB&T's commercial and industrial lending portfolio shrank by $445 million during the third quarter, and was just $244 million larger than it was a year earlier, even though the $181 million-asset company has been investing heavily in corporate banking. The net interest margin held up relatively well, shrinking by just 2 basis points from the second quarter and by 26 basis points from a year earlier, to 3.68%.

The company also disclosed that it had sold a consumer lending unit earlier this month with hopes of redeploying the capital over the long term.

BB&T warned that loan growth in the fourth quarter could be worse than what it reported for the third quarter. While management is hopeful it can mine opportunities in Alabama, Florida and Texas, King said BB&T has no interest in aggressively cutting rates or compromising terms to steal business. "We're not going to put more [of an] emphasis on cutting price and taking on more risk," he said.

Overall, net income fell 51% from the second quarter and 43% from a year earlier, to $268 million, though a tax adjustment played a role in the lower results.

Fifth Third: Less Use of Commercial Lines

Fifth Third executives were cautious in their loan outlook, even though the $125.7 billion-asset bank's total loans rose 5% year over year. 

Its lending rose less than 1% from the second to the third quarter.

"Sequential growth was a bit lighter than prior quarters as payoffs and paydowns offset new production in the commercial portfolio and as higher interest rates reduced demand for mortgage loans and refinancing in our consumer lending business," Kabat told analysts Thursday.

Its challenges included margin compression in two areas that have been growth drivers in recent quarters for many banks: C&I lending and auto loans. Yield on its C&I portfolio fell 9 basis points from the second quarter, and it declined 14 basis points in indirect auto lending. C&I loans rose to $38 billion, which was 15% higher than a year earlier but just 1% higher than the second quarter.

Furthermore, commercial line utilization declined to 30% from 31% in the second quarter, which was the "lowest level of utilization we have seen historically," Chief Financial Officer Dan Poston said.

Fifth Third officials seemed to be counting more on further expense reductions and fees for improved performance in the near future. Deposit service charges rose 10% year over year, and investment advisory fees and card processing revenue rose 6% each, officials noted.

M&T: Regional Variations in Loan Prices

M&T, in Buffalo, N.Y.,  reported its loans declined 1% year over year and 3.5% from the second quarter, to $62.7 billion. During a conference call on Thursday, executives told analysts and investors that competition is tough, but unevenly spread in its markets. For instance, the $84.4 billion-asset bank's upstate and western New York markets, its home turf, increased loans at 5% annual growth rate. The region including New York City, Philadelphia and Albany, N.Y. increased loans at a 4% rate. The Mid-Atlantic region, however, had "single-digit" declines, they said.

"There are levels of pricing pressure across the board. And I mention the mid-Atlantic because there it is significantly different," Rene Jones, chief financial officer, said in a conference call. The loan pricing in that market was "not really hitting our risk/return levels and we just can't use the balance sheet for that purpose.”

Jones says the fiercest pricing competition used to be from nonbanks, but banks have joined in on the competition, too.

Regional banks shared one thing in common: the insistence that they are not taking excessive risks to gain market share.

"We  have a very strong origination engine, but we want to make sure that engine actually produces profitable results," Fifth Third  Treasurer Tayfun Tuzun said in discussing the slow growth in the auto sector. "There may be strong growth, but if that growth does not meet our profit guidelines and targets, we will not go after that."

Time will tell if that is true for all the banks, and who the winners and losers will be.