Bankers are pressing on this year, though few seem to be having any fun doing so.
As more institutions report second-quarter results, it is becoming clear that low interest rates and a lack of expense-cutting opportunities are making it very difficult to prop up revenue and maintain profits.
Simply put: Expect a steep climb in coming months as bankers look for anything that can help them improve the bottom line.
Leaders at U.S. Bancorp, PNC Financial Services Group and First Horizon National, which reported quarterly results on Friday, largely reinforced this narrative during conference calls with analysts.
U.S. Bancorp and PNC were especially grim in their assessments for the rest of this year. First Horizon, though slightly more positive, still conceded it made a series of complex moves in recent months to protect itself against persistent pressure on its net interest margins.
Here is a summary of what executives as each of those companies said during their calls.
Imagine hanging on to a pull-up bar against immense pressure to let go.
That was the analogy Richard Davis, U.S. Bancorp's chairman and CEO, drew to describe the challenge the bank faces.
"Our knuckles are white, but we're still hanging in there," Davis said during the $438 billion-asset company's quarterly call with analysts.
In coming months, U.S. Bancorp will do what is necessary to keep its chin above the bar — so to speak — but it will have its work cut out. In addition to the margin pressure tied to low rates, higher expenses are expected to take a bite out of the company's otherwise-solid revenue growth, which rose 8% from a year earlier.
Commercial clients remain wary of tapping credit lines, too.
Those clients "are just taking this long, long, long period of time to restructure," Davis said.
For Davis — a well-known stickler for cost control — boosting revenue at a faster clip than expenses has been a priority. But Davis, who said in April that U.S. Bancorp wanted to achieve "positive operating leverage" this year, sounded more pessimistic on that score during Friday's call.
"We're not giving up on positive operating leverage, but it's getting a lot harder," he said.
Expenses are expected to increase by about 3% in the third quarter, as U.S. Bancorp continues to invest in marketing and work through a regulatory order issued late last year tied to anti-money-laundering compliance. Higher assessment fees from the Federal Deposit Insurance Corp. will also contribute to bigger expenses, said Kathy Rogers, U.S. Bancorp's chief financial officer.
The Minneapolis company also predicted that its margin could narrow by as much as 4 basis points this quarter as low rates continue to work against loan growth.
Still, the outlook isn't all bleak. The company will likely see continued gains in its payments businesses. Credit card agreements with Fidelity and Auto Club, for instance, contributed to a 12% increase in fee income.
U.S. Bancorp also expects loans and net interest income to keep growing at a steady clip. Notably, the company is again making a push in commercial real estate lending in San Francisco and other West Coast cities, after previously scaling back.
Executives also emphasized that, despite broader economic pressures, the company is gaining market share in certain businesses.
U.S. Bancorp has rapidly expanded its fixed income and capital markets business, and has made big gains in those areas, Andy Cecere, the company's president, said in an interview after the conference call.
"It's a business we didn't even have 10 years ago, for the most part," Cecere said.
PNC, which reported lower revenue from a year earlier, disappointed further by downgrading its forecast for the rest of the year. The Pittsburgh company, which had previously predicted "modest revenue growth," now expects revenue levels to remain flat.
The $361 billion-asset company's revenue fell 2% to $3.8 billion, largely reflecting the difficulties making money in a prolonged period of low rates.
"Look, it is a simple statement to make that it is tougher to get to positive operating leverage without help — or at least without pain — from interest rates," William Demchak, PNC's chairman and chief executive, said during his company's conference call. "But we're focused on being able to accomplish that."
PNC, which is in the middle of a multimillion-dollar investment to upgrade technology and other infrastructure, has little wiggle room to cut costs.
Management has been able to increase fee revenue in several areas, such as residential mortgages, deposit service charges, treasury management and corporate services such as M&A advisory fees and loan syndication fees.
Those areas will be important to PNC in coming quarters, Demchak said, though many of those businesses require upfront investment.
"The fee growth we have been after, and have succeeded at for however many quarters in a row … we get there through pretty heavy investments inside of our treasury management business on the commercial and industrial side," Demchak said.
PNC was also stung by an unusual item related to the Dodd-Frank Act. The company recorded a $51 million negative devaluation on some investments, because they do not conform with the Volcker Rule.
Most of those investments were associated with PNC's private-equity portfolio, said Robert Reilly, the company's chief financial officer. PNC chose to devalue them this year, even though the Volcker Rule doesn't take effect until next year, because management wanted to become compliant early.
"We know we have to sell this thing," Demchak said of the securities involved in the writedown. "What's it worth once you sell it, versus holding it? … Through time we will take a look at the related securities that are involved in that bucket and move them out before we get to the end of the Volcker window."
Making It Work
Bryan Jordan, First Horizon National's chairman and CEO, in contrast, was more upbeat, particularly when discussing his company's revenue and lending prospects.
"We're optimistic that average daily revenue in the second half of 2016 will be somewhat higher than it has been the last couple of years," Bryan Jordan, the Memphis, Tenn., company's chairman and chief executive, said during a conference call Friday to discuss quarterly results.
"Our pipelines are strong," Jordan said. "We're going to have a lot of good opportunities to put our capital to work."
To be sure, First Horizon had weathered some trying years since the financial crisis, largely due to a national mortgage platform that it unloaded. For instance, the company took a hit early last year tied to a $212 million settlement.
With very little noise in the second quarter, First Horizon's profit rose 12% from a year earlier, to $56.5 million, thanks largely to robust loan growth. The $28 billion-asset company reported that loans increased 10%, to $17.8 billion, including a nearly 40% spike in commercial real estate.
Commercial and industrial loans increased by 8%, helping to offset declines in residential mortgages. The C&I results were led by an exceptionally strong rise in loans to mortgage companies, which grew by nearly $400 million to reach $2.2 billion on June 30.
The pace of lending to mortgage firms has slowed somewhat "but remains very strong," said William Losch III, the company's chief financial officer.
Adding to its momentum, First Horizon, the parent of First Tennessee Bank, said its pending purchase of a $637 million book of restaurant franchise loans, which is set to close later this quarter, should be immediately accretive to earnings.
Jordan admitted during the call that his team isn't expecting any relief when it comes to loan yields and margins. "We are expecting lower for longer," he said in reference to expectations tied to interest rates.
First Horizon, as a result, has taken steps to moderate its asset sensitivity, including adjustments to Fed balances, fixed-rate trading inventory and long-term debt. Losch said the increase in commercial loans, and the planned addition of the franchise portfolio, will also protect the company's net interest margin.
First Horizon's margin stood at 2.92% at June 30, and Losch said the outlook for the second half of the year was flat. "We think we can defend the margin pretty well," he said.
First Horizon had been relatively quiet with acquisitions since the financial crisis. In the last year, however, it has bought the $445 million-asset TrustAtlantic Financial in Raleigh, N.C., and agreed to buy the franchise loans.
Jordan said during Friday's call that he is open to pursuing more M&A deals, especially any that would significantly increase his company's size.
"While I never say never, my preference is for a large, MOE-type of transaction," Jordan said, referring to a merger of equals.