Two regional banks, Fifth Third Bancorp and BB&T, on Thursday delivered what is becoming a familiar message this earnings season it is a frustrating time to be a banker.
Fifth Third in Cincinnati reported the double-whammy of weak mortgage banking revenue and a paucity of loan growth. And executives at BB&T, said the uncertain outlook for interest rates is wreaking havoc on how banks manage securities portfolios.
A day earlier, executives at PNC Financial Services Group in Pittsburgh and KeyCorp in Cleveland complained about similar matters in their own earnings reports. William Demchak, PNC's CEO, discussed how low rates are acting as a roadblock to higher net interest income, while KeyCorp CEO Beth Mooney lamented a slowdown in fee income.
Neither Fifth Third nor BB&T expects things to get better any time soon. Both Fifth Third and BB&T lowered guidance for the fourth quarter on several items, including net interest margin. BB&T said its third-quarter margin of 3.38% could compress by up to 5 basis points in the fourth quarter, while Fifth Third said it expects its margin to fall by 6 basis points from 3.10% to 3.04%.
"Both banks certainly are struggling with their net interest margin," said Erik Oja, an analyst at S&P Capital IQ. "My expectation was that [margin compression] would start to taper off, but the third quarter is showing us that the declines are just as bad as they were in the second quarter."
Other measures of the two banks' financial performance were also uninspiring.
Fifth Third's revenue fell 12% to $1.4 billion, from a year earlier, on declines in both fee income and net interest income. The fee income figure included a 49% decline in mortgage banking revenue to $61 million.
Revenue at BB&T increased slightly from the previous quarter and fell 2% from a year earlier, to $2.3 billion. BB&T's profit, which rose 22% from the second quarter and nearly doubled from a year earlier, was largely a result of a lower loan-loss provision and a reduced provision for income taxes.
The $187 billion-asset BB&T's quarterly performance, particularly its struggles with efficiency, concerned analysts.
Management earlier this year said it was targeting a 56% ratio by the end of 2014. During a conference call on Thursday, management urged analysts not to obsess over that number, adding that a 57% ratio now seemed more realistic. The efficiency ratio was 59.7% at Sept. 30. The lower an efficiency ratio, the better it is for a bank.
"We just want to dislodge ourselves a little bit from being so exact," Kelly King, BB&T's chairman and chief executive, said, expressing frustration with the interest rate environment. A flat yield curve has the potential to punish banks' net interest margins while, at the same time, pad fee revenue with renewed refinancing activity.
"To say a number would go to efficiency at this point would not be forthright because, again, the revenue side I can't control," King said.
Echoing the sentiment of other bankers this earnings season, King also discussed the challenges of cutting costs in a heightened regulatory environment. "I'll be very honest: it is challenging to get expenses down today," he said.
"We happen to invest a lot in technology and regulatory systems and process changes," King said, adding that the company expects noninterest expense to fall below $1.4 billion in the fourth quarter. "I know it hasn't shown up yet but we've been aggressive this whole year" cutting costs.
"I feel very confident in terms of maintaining the efficient structure we have today and [are] even beginning to see incremental improvements as we go forward, but the big kick for us, and everybody else in this business, is getting revenue lift," King said.
BB&T made several moves during the third quarter designed to improve its long-term financial position. It sold $550 million of residential mortgages for a small gain, while also extinguishing long-term debt at a $76 million after-tax loss.
BB&T pulled back some in prime auto lending due to tight spreads. Management added that it expects a slowdown in commercial-and-industrial lending, though lower loan yields could breathe new life into mortgage warehouse lending. BB&T also expects to make more loans for multifamily construction, and King said home equity loans and direct auto lending are gaining momentum.
FIFTH THIRD'S CAUTION
Loan growth was nearly nonexistent at the $134-million asset Fifth Third, with weak results in commercial-and-industrial lending and commercial real estate caused by "intense industry competition" and management "staying disciplined with pricing," Ken Zerbe, a Morgan Stanley analyst, wrote in a research note.
Kevin Kabat, CEO and vice chairman, defended his approach, saying Fifth Third will pull out of a potential loan deal if it does not believe it's getting "the full risk-reward benefit."
"With so much liquidity in the marketplace, it is going to be competitive and I do think you need to have some discipline in this regard," Kabat said in an interview.
Expense-management was a bright spot for Fifth Third in the quarter. Noninterest expense fell 7% to $888 million on lower salaries and employee benefits and reduced litigation expenses. At the same time, Chief Financial Officer Tayfun Tuzun forecast expenses to rise in the low-to-mid single digits from the third quarter to the fourth quarter because of numerous items, including preparing for comprehensive capital analysis and review stress testing.
"We're really kind of managing the things we can control," Kabat said. "I think we're being wise in terms of some of the investment we're making, not only in terms of revenue-generating capability, but also risk management and compliance."
On the matter of rate sensitivity, BB&T and Fifth Third are taking opposite approaches.
"We've been buying short floaters, buying intermediate cash flows and longer cash flows because we really don't know which way rates will go," Daryl Bible, BB&T's chief financial officer, said.
Fifth Third, on the other hand, is simply sitting things out, Kabat said.
"We are currently on the sidelines and not reinvesting in our investment portfolio," Kabat said. "In this environment, and in particular in the last week, it just demonstrates how volatile trying to formulate an interest-rate strategy against an investment portfolio is."
And even some good newsthe recent decline in 10-year Treasury yields and a potential pick-up in mortgage-refinancingfailed to generate enthusiasm from Kabat.
"We have seen a one-day pickup and I don't know if that will continue," Kabat said. "That's like predicting interest rates. If I could do that I wouldn't be in this role. Obviously, if the type of 10-year [Treasury note] pullback we've seen over last couple of days [continues], it could get folks interested. But how sustainable that is, I don't know."
BB&T was somewhat more bullish, with Bible saying that the 10-year Treasury note's movement caused a spike in refinance applications in the past two days.
"We could have things go back to what we had three or four years ago going through the recession where you had really strong mortgage activity," Bible said.