The past year was a bit of slog for most regional banks and, if fourth-quarter results are any indication of what's ahead, then 2015 isn't looking much better.
SunTrust Banks and PNC Financial Services Group on Friday reported an uptick in loan demand in the fourth quarter thanks to moderate improvement in the economy, but as was the case for much of the year, persistently low interest rates weighed down profits. As a result, banks remain under intense pressure to cut costs and grow fee revenue to make up for their inability to generate meaningful profit growth through lending.
"I think we are going to see a lot of the same in 2015, including continued cost-control efforts," Scott Siefers, an analyst at Sandler ONeill, said Friday after tuning into earnings calls of PNC and other regionals. "The two differences are that the economy seems to be on stronger footing, but living off reserve-releases seems to be ending."
Executives at the $345 billion-asset PNC in Pittsburgh said they are expecting higher rates in the second half of the year and built the 2015 expectations to include that. But they are also keeping close tabs in economic conditions abroad and how they might affect the Federal Reserve Board's decision to raise rates here in the U.S.
"We believe the domestic economy will continue to expand at a steady pace. This is our basis for expecting higher interest rates during the course of 2015," Rob Reilly, chief financial officer, said during a conference call with analysts on Friday. "However, we recognize the global macro factors are likely to persist and could prevail in delaying and/or diminishing otherwise anticipated rate increases."
Overall, PNC reported flat earnings from a year earlier due to a slight drop in revenue and marginally higher costs. The company reported fourth-quarter profit of $1.1 billion. Net revenue fell 3%, to $4 billion
Revenue at PNC will continue to be under pressure as any growth could be somewhat offset by the decline in purchase accounting accretion. That is a common problem for banks that were opportunistic during the financial crisis accounting treatments for assets bought on the cheap boosted earnings for years, but those effects are waning and are not being supplemented with as much new revenue.
PNC is also expecting that full-year expenses will be comparable to last years, which totaled $9.5 billion. During the call, the company was asked about its efficiency ratio goals and the answer was succinct: it doesnt have one.
"We don't have a specific efficiency ratio target, because the biggest driver of that is really outside of our control; and that's interest rates," Reilly said. "What we do is manage our expenses with a high degree of discipline. And we are committed to keeping those stable as we make continued investments in mostly our technology and retail bank transformation."
PNC said it is expecting modest loan growth in the quarter, too. It grew loans 2% in the fourth quarter from the previous quarter. During the call, Bill Demchak, PNCs chairman and chief executive, said the competitive landscape is also making revenue growth difficult.
"The willingness of competitors to stretch on risk and yield, particularly as we see [net interest margin] pressures because of rates, I think is probably going to accelerate," Demchak said. "And for us it's basically staying inside of our credit box, continuing to win new customers, and cross-sell in an environment where we'll progressively see more irrational competition."
At the $190 billion-asset SunTrust in Atlanta, loans grew 2.5% to $133 billion from a year earlier, and earning assets grew 7.5% to $169 billion.Those trends should continue this year, said William Rogers, SunTrust's chairman and CEO. Rogers projected continued growth this year in commercial, small-business and mortgage lending, and in other areas.
The growth in commercial lending, in particular, "is really, really broad-based," Rogers said during a Friday conference call. "Virtually every vertical that we're involved in on the [commercial and industrial loan] space grew."
SunTrust also got a boost to fee income from a spike in mortgages, with more than half of the mortgage activity in the quarter coming from refinancings, Rogers said.
"Mortgages are going to be a bright spot, if rates remain where they are," said Mark Nolan, a bond analyst at DBRS who covers PNC. "You will see some growth in that segment."
Still, SunTrust's net income fell 8.5% year over year, to $378 million, as legal costs related to mortgages offset an increase in loans and deposits.
Rock-bottom rates kept a lid on SunTrust's profit margin. Its net interest margin fell 24 basis points, to 2.96%, from the fourth quarter of 2013. That's SunTrust's lowest reported net interest margin since early 2009, Chris Marinac, an analyst at FIG Partners, wrote in a research note Friday.
"Net interest margin declined more than we had anticipated at the beginning of last year," Aleem Gillani, SunTrust's chief financial officer, said during the conference call. "In addition, the yield curve flattened significantly in 2014, with 10-year [Treasury] rates declining 80 to 90 basis points from already-low levels."
Even with growth in loans and earning assets, "for all banks it's going to be struggle" thanks to low rates, Nolan said.
Gillani projected that SunTrust's net interest margin will fall between seven and nine basis points in the first quarter, largely on lower commercial loan swap income.
Net interest income will fall by $50 million from the fourth quarter to the first quarter, due to lower swap income and because the first quarter has two fewer days, he said.
SunTrust will rely on fee income to offset compression of its net interest margin. Higher fees will come from several different areas, including mortgage refinancing and new originations, wealth management, credit cards and new fee products attached to commercial-and-industrial lending and commercial real estate, Rogers said.
"They're adding new fees for cash management, and you also get other various fees that come with large C&I lending facilities," said Michael Driscoll, a bond analyst at DBRS who covers SunTrust. "It's not just a pure lending piece of the equation."
Weak revenue growth may also force SunTrust to do more cost-cutting. The company's efficiency ratio fell 295 basis points, to 69%.
"We will calibrate what's happening on the revenue side to the expense side," Rogers said.