Fifth Third Bancorp, KeyCorp and Comerica Inc. may not have closed the book on losses stemming from the financial crisis, but they certainly appear to have begun a new chapter.
All three regional banking companies delivered better-than-expected fourth-quarter results, based largely on an improving credit picture that validated and, in many respects, outshone the encouraging trends emerging this earnings season among their larger rivals.
The results calmed fears about the potential effect of commercial real estate loan losses and suggested that the companies, which had taken a series of painful writedowns during the credit crisis, will be able to manage losses from here on out.
Those were the elements bankers and analysts focused on Thursday, overshadowing concerns about how long it will take for strong loan demand, more normal loss levels and bottom-line profitability to return to the industry.
Observers were particularly heartened by the declines in nonperforming assets, or NPAs, at Key and Comerica, and they were comfortable with the 1% uptick at Fifth Third. Delinquency-rate improvements and asset sales also fueled optimism, as did the strong payoff prospects on today's problem loans compared with the more aggressively underwritten loans that soured earlier in the credit cycle.
"Nonperforming-asset inflows are continuing to shift to products where loss severities are lower and workout options are greater, like C&I and income-producing real estate," Kevin Kabat, Fifth Third's chairman and chief executive, said on a conference call with analysts.
Of Fifth Third's $11.8 billion commercial mortgage portfolio, for example, about half is non-owner-occupied but still produces income. This cash flow gives the Cincinnati company more flexibility to modify loans on which borrowers are expected eventually to run into trouble, executives said.
In another sign that loss projections are easing, Comerica's watch-list loans — credits about which the company is on high alert for potential souring — declined by $520 million in the quarter, to $7.7 billion. Meanwhile, at Cleveland-based Key, nonperforming assets fell from $2.8 billion in the third quarter to $2.5 billion in the fourth, the first decrease in three years.
Fifth Third also shared good news on the provisioning front.
The company shrank its provision for loan losses from $952 million at the end of the third quarter to $776 million at the end of the fourth and suggested that rising loss provisions would be a thing of the past for a company that incurred almost $3 billion of provision expenses in excess of chargeoffs in 2008 and 2009.
"The burden of provisioning on earnings and in capital generation has been pretty material over the past couple years," Chief Risk Officer Mary Tuuk said on the company's conference call. "The elimination of that additional burden should have a significant positive effect on results even as chargeoffs remain higher than we'd like."
Net chargeoffs in the fourth quarter were $708 million, down 6% from the third quarter. The company reported an overall improvement in both commercial and consumer trends on that front, but it still is paying for an ill-timed expansion into Florida and Michigan. Those two states, among the hardest hit in the economic crisis, accounted for 27% of total loans and leases at Fifth Third, and 53% of losses.
Fifth Third had a bottom-line loss attributable to common stockholders of $160 million, or 20 cents a share, a drastic reduction from the loss of $2.18 billion, or $3.78 a share, a year earlier.
At Key, Chief Financial Officer Jeffrey Weeden said the company may have reached a tipping point in chargeoffs, saying they "should be less in 2010 than they were in 2009 but they are still going to remain elevated."
Chargeoffs rose 20.6% in the fourth quarter, to $708 million, compared with the third quarter. But the pace of Key's reserve buildup appears to be slowing. Allowances for loan losses rose by about 2% in the fourth quarter, after rising 6.2% in the third quarter and 16% in the second.
"Asset quality remains an area of focus for the company," said Key's chairman and chief executive, Henry Meyer. "However, during the fourth quarter we saw meaningful improvement in most of our credit metrics, including decreases in delinquencies, criticized and classified assets, nonperforming loans and nonperforming assets."
In the past two years, Key has shrunk its level of problem assets, selling bundles of troubled home builder loans and foreclosed properties. Its portfolio of residential property-related commercial real estate loans in California and Florida shrank by 24% last year. It has also reworked loans and supplied interim financing to developers who have been unable to line up long-term funding.
"Proactively addressing credit quality and reducing our risk profile has been and continues to be one of our top priorities," Meyer told analysts.
David George, an analyst at Robert W. Baird & Co., said in a research note that Key's "asset-quality trends were encouraging" and that it delivered a "better-than-expected quarter."
Key lost $258 million, or 30 cents per share, narrowing its loss from a year earlier of $524 million, or $1.07 per share. Analysts had forecast a loss of 39 cents per share, according to Thomson Reuters.
Dallas-based Comerica swung to a loss of $62 million, or 41 cents a share. It sold $10 million of nonperforming loans and took more writedowns on its commercial real estate portfolio in the West — which accounted for two-thirds of Comerica's total commercial real estate writedowns of $62 million.
CEO Ralph Babb Jr. said the company had already worked through the worst of its credit losses, with chargeoffs declining to $225 million from the third quarter's $239 million and loss provisions falling from $311 million to $257 million. However, he said he still expects provisions for credit losses to slightly exceed chargeoffs this year. Doing so is prudent, given the economic uncertainties, he said, but analysts were surprised.
"I suspect they might be being a little conservative," said Gary Tenner of Soleil Securities, who saw a strong possibility that the company would begin to release reserves this year. "The trends were so positive in the fourth quarter," he said.
In trading Thursday, Fifth Third shares surged 6.3%, to $12.02; Key climbed 5.5%, to $7.34, and Comerica gained 6.9%, to $35.88.