Fifth Third's M&A Ambitions and Other Banks' Revenue Strategies

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If one common theme is emerging from first-quarter results it's that many banks are still struggling to meaningfully increase top-line revenues.

The largest banks all showed weak to nonexistent revenue growth when they reported results last week and regionals such as Fifth Third Bancorp, KeyCorp, Citizens Financial Group and BB&T didn't fare much better when they announced results Thursday. Each bank said that total revenues in the quarter declined or barely budged from three months earlier, and all vowed to take steps to improve those numbers in the coming quarters.

Some are eyeing bank acquisitions or counting on recently announced acquisitions to increase and diversify their sources of income. Others are investing in fee-based businesses and new technologies, and all, of course, are trying to keep a lid on expenses.

Some community banks are playing offense as well. The chief operating officer at Mercantile Bank in Grand Rapids, Mich., told analyst this week that the $2.9 billion-asset bank is on a mission to build "a residential mortgage machine" by aggressively hiring more lenders.

Here's a look at how some banks are addressing their revenue challenges.

Fifth Third

Fifth Third in Cincinnati is eager to end its eight-year dealmaking drought.

Chief Executive Greg Carmichael said Thursday that the company is actively pursuing acquisitions in several of its key markets, including Chicago, Tennessee, Florida and the Carolinas. The goal is to boost the company's presence in regions where it's already a well-known brand.

Carmichael declined to provide details about the timing of a potential deal, or a target asset size. But he said the $142 billion-asset company is carefully evaluating its options.

"The market has not rewarded a couple of recent regional deals very well," Carmichael said in an interview following its investor call. "It's not lost on us to make a good business decision here."

Deals announced last fall by New York Community Bancorp and KeyCorp attracted ire from investors.

Fifth Third's last acquisition was in 2008, when it bought the $4.8 billion-asset First Charter Bank in Charlotte.

Additionally, Fifth Third plans to beef up its wealth management unit in an effort to boost fees. During the first quarter, investment advisory revenue fell 6%, to $102 million, driven by broader declines in the market. Overall, fee-based revenue was mostly flat compared with a year earlier.

Fifth Third is keeping its options open as it looks to expand its advisory business and is considering buying a nonbank firm that offers self-directed brokerage accounts, Carmichael said.

Hiring more financial advisers — particularly in Chicago, South Florida and the Carolinas — is another priority, he said.

"Wealth management is a low capital, heavy fee business for us," Carmichael said.


BB&T in Winston-Salem, N.C., outlined two simple strategic priorities for this year: boosting revenue and cutting costs.

In terms of revenue, BB&T will continue to invest in a "digital transformation" it launched last year, Kelly King, the $212 billion-asset company's chairman and CEO, said during a conference call Thursday. BB&T debuted its U platform — an application that lets clients set color schemes, profile pictures and other features — in September.

Wealth management, corporate banking and insurance are other areas where BB&T will aim to increase revenue.

A significant amount of time will be spent getting improved performance from a number of important acquisitions in the past year: Susquehanna Bancshares, National Penn Bancshares and wholesale insurance broker Swett & Crawford.

"We will be focusing on the cost synergies in the community bank, primarily in the Pennsylvania area," King said. "We've spent a fortune in the last several years building all that up, and now's the time to right-size that."

King reemphasized that BB&T has a reduced appetite for more acquisitions.

"It's my strong intuitive judgment that … it's time to focus on taking advantage of what we have," King said. "Sometimes people think about M&A as a linear, upward-sloping line. It's not. It's more like a stair step. You ramp up in terms of acquisitions and then you take a period of time and you rationalize them and then you ramp up again."


KeyCorp in Cleveland is counting on a recently announced acquisition to accelerate its expansion in mortgage lending. The $98.4 billion-asset company had been planning to build its own mortgage origination platform but scrapped that plan after it struck a deal in October to buy First Niagara Financial Group, which originates and services mortgages. KeyCorp's plan now is to build on First Niagara's success in mortgage lending.

KeyCorp executives are also considering how to best take advantage a lower cost of employment in upstate New York, where the $39.9 billion-asset First Niagara is headquartered. KeyCorp operates primarily in 12 states from Maine to Washington, so it has an opportunity to reduce overhead by shifting some operations away from higher-cost areas.

"There are moves afoot to look at leveraging both lower-cost space, a very attractive workforce in terms of skills and tenure, as well as an attractive labor market from a cost point of view," KeyCorp's Chairman and CEO Beth Mooney said during a conference call on Thursday discussing the company's first-quarter results. "We are looking at balancing out where and how work gets done."

Still M&A can be a drain on a company's time and resources. KeyCorp recorded $16 million in the first quarter in personnel costs needed for systems conversions and integration of the First Niagara deal.

Citizens Financial Group

The $140 billion-asset Citizens has the capacity to make acquisitions, but not the will — at least not yet.

Bruce Van Saun, Citizens' chief executive, told analysts Thursday that the Providence, R.I., company could come off the sidelines next year or the year after, but that for the time being it still needs to prove itself to shareholders. It's doing that in part by continuing to reinvest in new hiring and technology improvements, much of which it is funding by finding efficiencies in other areas in order to keep expenses low.

In an interview after the earnings conference call, Van Saun detailed just how enormous the task has been over the past several quarters as Citizens was spun off from its former parent, the Royal Bank of Scotland. "We've had to bring current many of our applications," he said. "We've put in a new teller platform in the branches, we have a new commercial-loan system, we have a new mortgage system. Many of the fundamental applications that the bank runs on we've had to replace and upgrade and bring current."

By next year, Van Saun said, Citizens should be done playing catch-up and ready to direct more of its resources toward "playing offense."

It is already playing offense in one crucial area: student loan financing. That business has skyrocketed in the past year, with loan balances more than doubling, to $4.5 billion.

Competitors have emerged in the student loan-refinancing market, but the biggest of them, the marketplace lender Social Finance, is "also an ally" in a sense, Van Saun said. Unlike a bank, SoFi tends to securitize or sell off the loans it originates. Citizens itself is planning to buy between $500 million and $1 billion of SoFi-originated loans in 2016, according to Van Saun. "It's just another turbocharger to the growth we have organically," he said.

At the same time, Citizens is "tapping the brakes a little" on auto loans, said Eric Aboaf, the bank's chief financial officer. It is originating fewer loans as it seeks to put its capital into areas with higher rates of return, such as student lending and commercial lending.

"The risk-adjusted rates of return in auto are not that great," said Kevin Barker, an analyst at Piper Jaffray. "And the competition is very strong."

As for acquisitions, Citizens has the money to spend. Its capital ratio is 11.6%, down from about 14% in 2014, but still higher than that of its peers.

All this cash on hand is "dry powder" that could be used to acquire another company, such as an asset manager or a mortgage bank, to help Citizens achieve its long-term goal of diversifying revenue away from net interest income and toward fee income, Barker said.

Alan Kline and John Reosti contributed to this story.

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