Swelling deposits and slowing loan growth are putting regional banks in a pickle.
On that most bank executives would agree, but many of them differ on how to get out of it. Two camps took clearer shape Wednesday.
On one side are upbeat chief executives like Richard Davis at U.S. Bancorp, who acknowledged that loan growth in the second quarter fell short of expectations. But Davis expects a flurry of activity once the Federal Reserve raises rates.
Then there are the less optimistic like Bill Demchak, the chairman and CEO of PNC Financial Services in Pittsburgh, who thinks loan growth will come slowly and the deposits needed to fund more lending will be hard to pin down.
U.S. Bancorp's Davis reiterated his refrain from past quarters that the company just needs to hang on until interest rates rise and that gives the bank reason to make more loans. U.S. Bancorp expects loan growth to be in the 1% to 1.5% range in the third quarter compared with 0.7% from the first to second quarters.
"My philosophy is the minute it's known rates are moving up will be the catalyst," Davis said on a conference call with analysts Wednesday. "The consumer blinks first. I'm still optimistic that we're making progress and going in the right direction. I'm hopeful the [Federal Reserve] sees it the same way."
Yet there are others who fear that once rates rise, deposits will flee faster than banks can gear up their loan machines. JPMorgan Chase's chief financial officer, Marianne Lake, sounded the warning Tuesday that she is "expecting retail deposits to reprice higher and faster in this cycle than in previous rising-rate cycles" because of technological, regulatory and other changes.
Demchak seemed to echo that point and position himself as far less optimistic than Davis about loan growth in a separate conference call with analysts Wednesday.
Both PNC and U.S. Bancorp have had similar rates of loan growth over the past 12 months. U.S. Bancorp's total loans in the second quarter rose 2.5%, compared with a year earlier, and PNC's rose 2%. Both say they are flush with deposits and aren't seeing sufficient loan demand yet to make use of the excess liquidity.
"U.S. Bank thinks there is going to be a big loan-growth spurt," Demchak said during a conference call to discuss earnings. "I hope they are right. [JPMorgan] and ourselves, [we're] probably in the camp that we are probably going to see deposits shrink."
In other words, Demchak expects to see at least moderate levels of deposit runoff if the Fed raises interest rates later this year, as consumers try to get a better rate at other banks, said Scott Siefers, an analyst at Sandler O'Neill.
Demchak contrasted PNC's commercial lending to that of the largest banks, saying PNC does more business with middle-market borrowers while the likes of JPMorgan and Bank of America do more lending with large corporations.
Because the competition to make commercial and industrial loans to midsize companies is so fierce, PNC has taken a pass on a lot of business as it seeks to maintain credit discipline, Demchak said.
"Some of the growth that has been out there in the market seems to be outside PNC's risk tolerance," Siefers said.
To offset the lower rates of C&I loan growth, PNC has boosted services that generate fee income. So while PNC's second-quarter profit fell from a year earlier, the decline would have been worse without its 8% year-over-year rise in noninterest income.
"I don't know what is going to change to cause pure middle-market lending-only relationships to be any more attractive, which is why we are focused so much on growing fee income in the cross-sell relationship," Demchak said.
Nearly all banks are struggling with the bigger problem of deposit growth far outpacing loan growth, Davis said, yet he continued to paint an upside to the massive buildup in bank deposits.
"It's a great problem," Davis said. But "we all know in a few quarters or years that's going to be the gas in the engine for making loans."
U.S. Bancorp officials were heartened by it stronger showing in categories such as auto and commercial loans. Meanwhile, its net interest margin, the difference between what a bank pays out on deposits and what it makes on loans, has stabilized, at 3.03% in the second quarter, down from 3.27% a year earlier.
Davis' remarks echoed comments made Tuesday by Wells Fargo's Chairman and CEO John Stumpf, who also is waiting for a spurt in loans.
"There is a fair amount of capacity to carry more debt by medium-sized companies, small companies and consumers," Stumpf said. "Rates are very favorable and most Americans businesses and consumers have de-risked and deleveraged their balance sheet, so there are opportunities."
How it all plays out may depend on how sticky a bank's deposits are.
Deposits at U.S. Bancorp rose 8.9% in the second quarter, compared with a year earlier. But Davis thinks not all deposits are created equally since roughly 15% of the bank's corporate deposits come from its trust business and are likely to stick around.
Demchak's message was familiar to investors, who've heard PNC's leader try to tamp down expectations for several consecutive quarters, said Mark Nolan, an analyst with DBRS.
"They're very cautious and rational in regards to loan growth, which is probably a good strategy given the competition out there for certain types of loans," Nolan said in an interview.
As part of that cautious nature, Demchak announced an expansion of its cost-cutting plan, saying that PNC now expects to shave $500 million in expenses this year, up from its original estimate of $400 million.
The widening of cost-cutting efforts comes as PNC and other banks expect the Fed to raise rates at a much slower, more gradual pace than many had predicted at the beginning of the year, Siefers said.