Regional Bankers Upbeat About Consumer Lending

Commercial lending remains the brightest spot for many regional banks' fourth-quarter results, but there are also some glimmers of hope in consumer businesses.

Executives at Fifth Third Bancorp (FITB) in Cincinnati and KeyCorp (KEY) in Cleveland were hopeful about consumer confidence improving and possibly leading to more opportunities this year. Their outlook reflected that of other executives, including Richard Davis at U.S. Bancorp (USB), who predicted that 2014 may be better for banks.

Still, consumer businesses face steep challenges. The refinancing boom that helped earnings for much of last year is all but over. New mortgage regulations have executives worried about profitability in that business line. And several banks, including Fifth Third, have deposit-advance business after facing pressure from regulators.

"We saw signs last year of consumers showing recovery, particularly as housing prices began to firm up," Beth Mooney, Key's chairman and chief executive, said during the company's quarterly conference call Thursday.

"Could this play out to be an opportunity in 2014 I think is a big question that we will all be watching as the year goes on," Mooney added. "If these things do indeed translate into greater confidence in business and consumers, will we see increased activity from what we are projecting?"

Executives at the $92.9 billion-asset Key pointed to growth in home-equity lending as a sign of rising confidence. Those loans rose more than 4% from a year earlier, to $10.7 million.

In addition, executives said increased fee income from its cards and payments operations reflected the successful purchase of its branded credit card portfolio. Key bought the portfolio, which included roughly 400,000 consumer and business accounts, in 2012 from Elan Financial Services. It has since seen growth in that business, William Koehler, president of Key Community Bank, said during the call.

"I think most people would say the consumer is getting steadily stronger," Koehler said. "We think there are more opportunities there. As the consumer gets stronger, you can envision more investment."

Despite this optimism, Key's consumer loan portfolio grew modestly from a year earlier and was relatively unchanged from Sept. 30. Consumer mortgage income also fell from a year earlier.

In contrast, commercial, financial and agricultural loans rose almost 8% from a year earlier. Executives called multifamily lending a "bright spot," adding that commercial real estate had "a fair amount of momentum" that reflected solid pipelines. Still, management was cautious about certain multifamily markets, including Washington, D.C.; Raleigh, N.C.; Denver and Seattle.

Key, which has been chronically hammered for having a high efficiency ratio, is looking to improve productivity and steal market share this year, executives said. It plans to hire bankers in "very targeted ways where we see opportunity to enhance our presence in either industry groups or in specific geographies," Koehler said.

Key's earnings rose nearly 14% from a year earlier, to $224 million. Earnings per share of 25 cents met the expectations of analysts polled by Bloomberg.

Overall, Key's results were mixed, with better core fees but "meaningful pressure" on the net interest margin, Andrew Marquardt, an analyst at Evercore Partners, wrote in a note to clients. The margin compressed 36 basis points from a year earlier, to 3.01%.

"Expenses were worse than expected with [an] efficiency ratio modestly above long-term goal," Marquardt added. In 2012, Key launched an initiative to cut costs and achieve an efficiency ratio between 60% and 65%. Key cut $241 million in expenses last year while its cash efficiency ratio was 67.4% at Dec. 31.

Fifth Third also said it had gained some traction in consumer lending. Its consumer loans edged up 1% from a year earlier, to $36.5 billion, buoyed in part by 9% growth in credit card lending. That growth somewhat offset the effects of the national slowdown in mortgage refinances and an 8% year-over-year drop in home-equity loans. Fifth Third's mortgage banking revenue was cut in half from a year earlier, to $126 million.

Legal and regulatory problems also overshadowed some of Fifth Third's results, especially in its consumer businesses. The $130 billion-asset company took a $69 million charge to add to its litigation reserves; it also realized a $33 million repurchase loss, related mostly to a settlement with Freddie Mac. Fifth Third agreed in November to pay the government-sponsored enterprise $25 million over loans that it originated and sold to Freddie.

Regulators have been stepping up restrictions on deposit advances, or the short-term loans Fifth Third and a handful of other banks had offered as an alternative to payday loans.

Fifth Third said earlier this month that it would no longer offer the product, though CEO Kevin Kabat said Thursday that the company is looking for a replacement that lets it offer short-term credit to lower-income customers while complying with regulators' tightened standards. "We see... a high demand in this area," Kabat said.

"We have been... working with all of our stakeholders in trying to come up with solutions that we think would benefit everyone," Kabat said, adding that while Fifth Third lacked a specific alternative, "we will continue to look to see if we can't find a good solution [and] keep our clients in a regulated banking system, which we think is best for all."

Commercial-and-industrial lending, particularly in construction, powered most of Fifth Third's quarterly profit, which fell 2% from a year earlier but still slightly beat expectations. The company reported net income of $383 million, or 43 cents a share — a penny better than the average estimate of analysts polled by Bloomberg.

Commercial loans and leases grew 8% from a year earlier. Commercial construction loans rose 39% year over year, to $952 million. Line utilization fell slightly to 29% from 31% a year earlier, but Kabat said he was heartened by the increased optimism he is hearing from his customers.

"The tonality I would tell you has changed," and customers are more "upbeat in terms of their view" of the economy, he told analysts during Thursday's conference call, citing an improvement in customer attitudes in just the past three to four months.

"How fast the change comes, we are not sure," he added. "But we have seen fairly good production [and] continued strong pipelines from that standpoint, which would be consistent with some of that outlook."