Regional Banks Have No Time to Celebrate as Risks Loom

Regional banks have the most good news to share to start a year in a long time — but they can't enjoy it.

Lending is still on the rise, but momentum is dwindling in some places. Profits are strong but threaten to narrow along with margins. Mortgage refinancings can't thrive forever, and economic and political uncertainty is said to restrain the business borrowing that could take its place.

What's left then? Cost-cutting, stealing market share from rivals, finding commercial niches — and resisting the urge to gamble.

"We're simply not going to go back out of the frying pan into the fire in terms of taking on a bunch of higher-risk-profile types of credit," Kelly King, the chairman and chief executive of BB&T (BBT), told analysts Thursday.

Caution underlay the near-term forecasts of several companies as they released quarterly results, with optimism reserved for vague points later in the year.

FIFTH THIRD

Fifth Third Bancorp (FITB) forecast net interest income in the current quarter to fall 2%, or $885 million, from the fourth quarter. "We currently expect net interest income to grow during the year," though 2013 levels could be flat compared with last year, Dan Poston, the Cincinnati company's chief financial officer, said during a conference call.

A big factor is the net interest margin, which compressed 7 basis points in the fourth quarter from a quarter earlier, to 3.49%, partially offsetting broad-based loan growth. Poston said that he expects that margin to end up between 3.35% and 3.40% in 2013, with most of the compression taking place in the first half.

Fifth Third projected mid- to high-single-digit loan growth this year, compared with 2012, with expansion expected in commercial and industrial loans, residential mortgages and auto lending. The home equity portfolio will likely contract. Total loans increased 5% from the third quarter and 6% from a year earlier, to $88.7 billion at Dec. 31.

"We feel very good about [the commercial loan] pipeline," Kevin Kabat, the company's vice chairman and chief executive, added on the call. "Healthcare continues to be very, very strong and a very good line of business for us … and we feel good about the manufacturing business going on around us."

Fifth Third is making loans in leveraged finance, an area that BB&T is shunning, with an emphasis on mergers and acquisitions among clients. Still, management made it clear that Fifth Third was watching its exposure in that area.

"We do feel very good about the risk reward and that value that we are seeing," Kabat said. "That should give you a comfort and an indication of our confidence of driving the right business and the right value for the risks that we are taking."

HUNTINGTON

Commercial loans at Huntington Bancshares (HBAN) in Columbus, Ohio, expanded about 10% last year, CEO Stephen Steinour said. But its overall loan portfolio expanded at an annual rate of 3% in the fourth quarter, and the $56.2 billion-asset company's press release included hints of caution, noting the brakes put on by "hesitant" business customers.

"It was very clear, beginning in the middle of the third quarter, businesses were starting to defer decisions, starting to defer investments," Steinour said in an interview. "To some extent, that is still continuing."

The onus remains on policymakers in Washington to resolve economic question marks that the short-term deal on the fiscal cliff only postponed, he said.

"As soon as we get beyond the theater in Washington around cliffs and other things …I think there is a wave of pent-up investment that will come through," Steinour said.

Steinour is hopeful that Washington will act, and that the economy will pick up, though the momentum may not occur until the second quarter or later, he says. Huntington's home turf, the Midwest, will surge, especially in the manufacturing, healthcare and energy sectors, he says. "It's ready to significantly move forward," he said.

Until then, Huntington has "moderated" its investment in its business and will kept focusing on adding consumer checking customers, Steinour said. That focus, which led to a shift toward checking and away from higher-cost savings products, and the benefits from its acquisition of Fidelity Bank in Dearborn, Mich., resulted in a margin of 3.45%. That was seven points higher than a year earlier and the previous quarter.

Still, net interest income is expected to "modestly grow" this year, the company said in its press release Thursday.

BB&T

BB&T had a relatively upbeat outlook for the new year in terms of lending opportunities and expectations for rising interest rates. Total loans rose 6% in the fourth quarter compared with a year earlier, to $118 billion, with growth in most asset categories.

Loan growth played a key role in the Winston-Salem, N.C., company's improved quarterly performance. Fourth-quarter earnings rose 8% from the third quarter and 27% from a year earlier, to $506 million.

BB&T should be able to expand the size of its loan portfolio by 2% to 4% during the first quarter, Kelly King, BB&T's chairman and chief executive, said during a conference call Thursday to discuss the quarterly results.

The company could easily surpass those projections if it decided to demonstrate less discipline. "We could double our loan growth in short order if we wanted to," King said, adding that that BB&T was witnessing some "slippage in the marketplace" in terms of other banks overreaching to book loans.

But BB& T will stay focused on opening corporate banking offices in key national markets, expanding its wealth management capacity by hiring advisors, and making loans to the "better players" in the homebuilding industry, he said.

"We're booking CRE commitments that are unfunded and we're booking lines of credit for companies that are not yet funded," King said. "Clearly there's a more positive attitude than a year ago, and I think what they're doing is locking in their commitments. They're getting plans ready to go and then they want to see things settle down."

That should put BB&T and its borrowers in a better position later in the year.

"To be honest, depending on how things happen in Washington … there's a very good chance that you're going to see some pickup in momentum in the economy and you're going to clearly see some pickup in momentum in borrowings," he said.

King also held out hope that interest rates could start to edge up by the end of the year. BB&T's net interest margin compressed 10 basis points from the third quarter and was flat from a year earlier, to 3.84%. BB&T expects its net interest margin to end up around 3.75% in the first quarter, Daryl Bible, the company's chief financial officer said during the conference call.

"We expect a modest decline in margin after the first quarter," Bible said. "We remain slightly asset sensitive and are positioned for rising rates."

PNC

Add PNC Financial Services Group (PNC) in Pittsburgh to the list of companies that say expense management will be the key to continuing positive operating leverage in 2013. With a few exceptions, the company has run out of ways to ratchet down the interest it pays out.

"Most of what we could do on the liability side we have done," said Richard J. Johnson, chief financial officer, during the $305 billion-asset company's conference call on Thursday.

So, the company is turning to mining its growing customer base, which was aided by the 2012 acquisition of RBC Bank USA, and eyeing expenses. The company says it expects first-quarter expenses to decline $300 million, or 11%, as compared to the fourth quarter, with costs associated with mortgage foreclosure compliance shrinking and no expected integration costs.

James Rohr, PNC's chairman and CEO, said in the call he is committed to continuing to grow operating leverage, and if the company cannot achieve revenue growth that outpaces its expenses, it will cut its expenses.

"Until the interest rates rise or we get a 4% or 5% economic growth, neither of which we are projecting, I think we just have to keep working on expenses and growing customers so that we have a good run rate going into 2014," he said.

The company's managed to grow loans at an annual rate of 8% in the quarter, with the company attributing the growth to asset-based lending and inroads made in the health care and energy sectors. The company's net interest margin was 3.85%, up three basis points from the previous quarter. The company declined to give net interest margin guidance, saying there were too many factors outside of its control.

"What is important to us is the fact that we are growing loans and we'll continue to grow loans," Johnson said. "To the extent there is compression on the yields in the industry, we will try to offset that to the best we can with loan growth. And as a result, that is where we feel core net interest income will continue to go up."