Three banks in growth mode reported quarterly results Thursday that showed there is momentum to be had these days, but it comes with a price and some steep challenges.
The trio — BB&T, Huntington Bancshares and Citizens Financial Group — are each led by executives with a vision. For BB&T and Huntington, acquisitions are central to those plans.
BB&T's Kelly King wants to consolidate gains after recent acquisitions in the Northeast and is especially excited about lending opportunities in Philadelphia. Huntington's Steve Steinour still needs to close a major deal in Ohio, and he is already salivating over the small-business-lending opportunities in Chicago.
But M&A deals entail short-run costs that have to be managed or recouped. BB&T is moving into cost-cutting mode, and Huntington may ultimately have to do the same after seeing its expense ratio rise to 66.10% last quarter compared with 61.70% a year earlier.
Citizens, head by Bruce Van Saun, is in a slightly different situation. It is focused on internal growth, having completed its spinoff from Royal Bank of Scotland last fall. It isn't involved in any acquisitions — at least not yet — but is seeing rapid growth in several key consumer loan portfolios. At the same time, it has been significantly trimming costs and announced plans Thursday to keep it up; its efficiency ratio stood at a relatively high 70.02% in mid-2015, and it had improved to 64.71% by mid-2016.
Meanwhile, all three companies are on guard for the credit-quality challenges associated with loan portfolios swelling from acquisitions and organic growth.
Here is a roundup of their stories and their chief executives' outlooks.
Battling Cost 'Creep'
BB&T, which has integrated two big acquisitions in Pennsylvania, is shifting its focus to a thorough review of corporate expenses.
Just don't expect a branded cost-cutting effort — no "One BB&T Project" or some such is planned. And don't wait for any bold forecasts or across-the-board reductions. That is not the company's style.
Instead, the process at the Winston-Salem, N.C., company will involve a comparison of costs that are required with those that have unnecessarily taken root over the past two decades.
"I'm saying go back … and examine anything today that we're doing that we weren't doing 20 years ago," King, the $222 billion-asset company's chairman and CEO, said during a conference call to discuss quarterly results.
"If it's something that we're doing that we're absolutely required to do by regulation, then obviously we have no choice," King added. "If it's something that has evolved or creeped into the structure, which can happen when times are fairly good, then it is suspect. … We're going to examine every one of those in terms of the economic productivity, and I suspect that we'll find material changes."
BB&T already has several things under way, though King was reticent to share any details. King reluctantly told analysts on the call that the company would like to lower its efficiency ratio to 57% in the next two to three years, though he cautioned that hitting that mark also depends on economic factors and revenue generation. The ratio was 59.3% at June 30.
Cost-cutting will be largely handled by BB&T's nearly 38,000 employees, rather than management, King said. "We still do it from a top-down, bottom-up perspective, focusing on allowing our people to help figure out the best ways to restructure their businesses, versus us trying to sit in our offices and make the decision," he said.
"Our people are excited about the endeavor, and I think we'll get really, really good results from that," King added.
Expense control would pair up well with the revenue growth BB&T displayed in the second quarter; it reported profit that topped Wall Street estimates. Revenue increased 8% from the first quarter and 18% from a year earlier, to $2.7 billion. Quarterly comparisons were skewed somewhat by BB&T's purchases of National Penn Bancshares and Susquehanna Bancshares.
Total loans rose 7% from the first quarter, to $145 billion, and the net interest margin only fell by 2 basis points, to 3.41%. John Pancari, an analyst at Evercore, credited the Pennsylvania operations for protecting the margin from further downward pressure.
BB&T's management also noted that average loan balances, absent the impact of National Penn, increased by $860 million during the second quarter, with corporate lending playing a major role.
King, meanwhile, was upbeat about BB&T's chances of making more loans in Pennsylvania in coming months. "The receptivity we've had in Philly has been fantastic … and the people there, frankly, like us," he said.
Gains and Pains
At the $74 billion-asset Huntington, net earnings were off 11% year over year, but the drop was due largely to $21 million in charges related to its pending acquisition of FirstMerit in Akron, Ohio.
But Steinour, the chairman and CEO of Columbus, Ohio-based Huntington, remains upbeat about the $3.4 billion deal, which is expected to close in the third quarter.
"There's still a lot to do, but integration has gone incredibly well," he said.
One reason for Steinour's sunny outlook might be Huntington's impending entry into the Chicago market. FirstMerit has had a Windy City presence since 2009, when it purchased 24 Chicago-area branches from St. Louis-based First Bank. FirstMerit has never done Small Business Administration-related lending in Chicago, and Huntington — one of the nation's largest SBA lenders — is eager to unleash its small-business bankers there.
"It's a very attractive market for us," Steinour said.
Huntington's loans grew 8% over the second quarter of 2015 to $52.5 billion. The growth was accompanied by an uptick in nonperforming assets, which totaled $490 million on June 30 — compared with $396 million a year earlier.
Steinour characterized the increase as a normalization of Huntington's credit quality after several years of historically low levels of problem loans. He said he sees no signs of additional deterioration on the horizon. Indeed, compared with its first-quarter results, Huntington's credit quality improved. The company reported $525 million of nonperforming assets on March 31.
One business lines that has shown no sign of credit problems is auto lending. With a $10.4 billion-asset portfolio of car loans, Huntington ranks as one of the nation's largest automobile lenders, and despite regulators' concern that the sector might be close to overheating, Huntington continues to operate at near-pristine levels.
Nonperforming auto loans of $5.1 million amount to just 0.05% of Huntington's automobile lending portfolio.
"We've been hearing about problems [in auto lending] for about a year and ahalf, so I know they exist, but we've been very disciplined," Steinour said. "If you look at our results, you'll see seven years of very disciplined lending."
Michael McTamney, an analyst who covers Huntington for ratings firm DBRS, described Huntington's second-quarter results as "solid." McTamney added that he expects more of the same for the rest of 2016.
"I think the FirstMerit deal strengthens Huntington's franchise and its earning power," McTamney said in an interview Thursday. Credit quality also looks good and net chargeoffs are running below long-term levels."
Seeking Growth 'Pockets'
Citizens Financial on Thursday reported perhaps its best quarterly results since it began reporting in the third quarter of 2014, but the $142 billion-asset bank is not resting on its laurels. Instead it remains constantly on the lookout for "attractive pockets of growth," its chief executive and chairman, Van Saun, said.
For Citizens, one of those pockets has been student lending. While the bank's average consumer loans rose 7% from the second quarter of 2015 to the same period this year, its student-loan book ballooned 91% to $5.1 billion. Citizens began investing heavily in student financing in the fall of 2014, as the auto finance market was becoming less appealing.
Not only are the loan returns attractive, but the student-finance products "bring younger customers to the bank," Van Saun said, "so we're going to continue to pursue that growth."
On the commercial side, loan growth was even stronger in the second quarter than it was on the consumer side. Average commercial loans increased 11% to 11% to $45.9 billion.
Swelling loan portfolios typically carry the risk of more delinquencies and chargeoffs. But Citizens has kept its bad credits down by maintaining high lending standards, as with its student-loan refinancing product, for which the ideal borrower, according to Van Saun, is a 33-year-old with an established job, a FICO score in the high 700s and a history of prompt repayment. The bank's net chargeoffs decreased by $13 million from the second quarter of 2015.
Even amid impressive growth, the Providence, R.I., bank remains dedicated to a seemingly permanent cost-cutting regime. Much of the efforts on this score are under the aegis of the Tapping Our Potential, or TOP, program, the first phase of which saved Citizens about $200 million in expenses. That in turn allowed the bank to self-fund other projects. The second phase is on track to provide $90 million to $115 million of benefits this year, while TOP III, announced Thursday, should cut between $73 million and $90 million of expenses and provide $10 million to $15 million in tax benefits in 2017, executives said.
"We've identified another $100 million [of savings] just as we did last year," Van Saun told analysts during an earnings call. "It's really money in the bank, is how I think about it."
In a research note, Sandler O'Neill analysts said the TOP III initiative should help to offset various costs, including separation costs from the Royal Bank of Scotland, its erstwhile parent company, "pertaining to vendor contracts."
Citizens has also cut 74 staffers since March 31.
Even as the bank enjoys broad growth and sees yields pick up across most of its portfolios, Van Saun remains aware of the need to stay diversified. He speaks of having a mental "heat map" to keep track of when certain markets — such as multifamily homes in Washington, D.C., near the end of last year — become overheated.
The question, he says, is, "Are we growing prudently and being selective about how and where we play? The answer to that is yes."