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Some banks appear to be aggressively pursuing loan growth at the expense of profits these days. But banks like M&T and Westamerica say they are slowing things down, hoping the caution will translate into better credit quality in the long run.
April 20 -
First-quarter results from U.S. Bancorp and PNC Financial Services Group shows banks have little choice but to wait until the Fed raises interest rates. They have cut expenses almost as far as they can go, and fee income is limited in how much it can offset narrower spread income.
April 15 -
Bank of America reported its best quarterly profit in more than a year, but with revenue declining and expense-reduction slowing, it is unclear where the company can turn to boost earnings. Similar questions are plaguing many banks as the latest earnings season unfolds.
April 15 -
The San Francisco bank has produced enough growth in mortgages, C&I and other areas and made other moves to offset low rates. It is a hopeful example for mortgage-heavy banks and other lenders battling tight margins.
April 14
BB&T's future is heavily dependent on the Federal Reserve Board on two fronts.
After reporting soft revenue growth in the first quarter, the Winston-Salem, N.C., company warned Thursday that it will have a difficult time boosting net interest income in coming months. In doing so, it channeled the message from many of its big-bank peers this earnings season.
Management said during the call that the $189 billion-asset company's earnings trajectory should improve once interest rates rise and, moreover, it completes two key acquisitions.
Since both catalysts are reliant on Fed action, BB&T is spending the second quarter focusing on producing higher-quality revenue, in terms of credit risk and diversification, rather than simply trying to increase its top-line numbers. And, much like other banks, BB&T is doing what it can to control costs.
"We are building a business which has a very strong, diversified and resilient balance sheet," Kelly King, BB&T's chairman and chief executive, said during the company's conference call with analysts Thursday. "It produces steady revenue, less-volatile earnings and steady growth as well."
BB&T, for instance, is looking to decelerate growth of certain types of loans that have lower yields, such as prime auto, in hopes of stabilizing margins in the second quarter. Prime auto and multifamily lending were offered as examples of areas where underwriting standards might be getting looser, too. BB&T has also been running down its residential mortgage book in recent quarters.
"We are being careful in multifamily," King said. "We think it is kind of peaking, and so we are being careful in underwriting, and certainly in some markets we have really curtailed lending because we think it is overheated."
Overall analysts have been generally supportive of BB&T's strategy, which also relies on income from businesses such as insurance brokerage to counter margin pressure on its balance sheet.
"We continue to like the revenue diversity that BB&T possesses," Stephen Scouten, an analyst at Sandler O'Neill, wrote in a note to clients Thursday. Fee income made up nearly 46% of BB&T's first-quarter revenue, he pointed out.
"Results should improve with stable net interest income, higher fee income, positive operating leverage and benign asset quality," Jason Goldberg, an analyst at Barclays, wrote in his note to clients. BB&T had projected margin expansion in the first quarter, only to report some compression, he said.
And it was hard for investors to overlook management's sobering second-quarter forecast for net interest income, which is expected to remain flat from the $1.3 billion produced in the most-recent quarter. The net interest margin, which fell by 3 basis points in the first quarter, could narrow by another 6 to 8 basis points in the current quarter.
BB&T's shares fell 2.6% on Thursday.
BB&T also projected that loans would increase by 3% to 5% from the first quarter, but King also cautioned that commercial-and-industrial-loan growth would "be a little bit slower." He also warned that competition is fiercer than it was before the financial crisis.
"There are more actors out there," King said. "I think everybody is reacting to a really tough environment and some are frankly getting a little overzealous and are taking a bit more risk than they ought to."
Intense rate competition has contributed to "abnormally high runoffs" in some of BB&T's loan portfolios, King said.
BB&T is optimistic that rising rates and its pending deals will provide a lift later this year.
Management said it also expects a small rate increase between June and September. Daryl Bible, BB&T's chief financial officer, cautioned that the Fed is expected to gradually raise rates.
"Don't expect 25 basis points every Fed meeting," Bible said. "That means the rate environment will still be challenging for us and everybody else."
Bible added that Susquehanna Bancshares in Lititz, Pa., which it hopes to buy by the end of this year, could add 10 to 15 basis points to its margin. Bank of Kentucky, a deal that gets BB&T into the Cincinnati suburbs, could help net interest income by adding millions of dollars in loans.
Still, it could take some time before those deals, along with BB&T's recent purchase of dozens of Citigroup branches in Texas, really start to contribute to earnings.
"In all three cases, we're entering very large markets with very, very low market shares," King cautioned before adding that BB&T should be able to "ramp up the revenue side" of those deals "very quickly relative to other traditional mergers."
