Guarded optimism from bank execs as economy reopens

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Bank executives waded into the crosscurrents of the U.S. economy this week, generally painting a more upbeat picture of the economy than many bankers had in recent weeks — but warning that plenty of uncertainties remain.

Societal and economic signals have been mixed in recent days: The unemployment rate for May was 13.3%, far better than forecast but still the worst since the Great Depression; new novel coronavirus cases are slowing in former hot spots like New York but are said to be accelerating in a more than a dozen states as the economy reopens; and the stock market had been soaring before giving back some gains Tuesday, even as protests grow nationwide over systemic racism and unequal economic opportunity.

But executives at banking companies such as Citizens Financial Group, Comerica Bank and Truist Financial said Tuesday during a virtual investor conference sponsored by Morgan Stanley that commercial customers are showing renewed interest in seeking credit, consumers are managing their loan payments relatively well and loss-reserves may not rise as much as had been expected.

Truist Chairman and CEO Kelly King, Comerica Chief Credit Officer Melinda Chausse, and PNC Chairman and CEO Bill Demchak
Truist chief Kelly King says he has received assurances from his lieutenants that “clients are doing fine relative to what’s going on” because of lessons learned in past crises; Comerica officials “have actually seen a pretty good pickup in activity in loan committee with requests from existing customers,” Chief Credit Officer Melinda Chausse says; but PNC CEO Bill Demcak warns “there's big sectors that are in trouble here that are going to show up and play out through time."

“Customer optimism has definitely shifted away from purely focused on managing through the stay-at-home orders to really positioning them for what’s to come next in the six to 12 months,” said Melinda Chausse, chief credit officer of Dallas-based Comerica.

That said, several warned that key sectors including energy, hospitality, dining and commercial real estate have been severely damaged; expressed concerns about the speed of the overall recovery and the possibility of a coronavirus resurgence; and warned forbearance practices could be hiding some underlying consumer credit weaknesses.

“There's big sectors that are in trouble here,” PNC Financial Services Group Chairman CEO William Demchak said.

Citizens: Favorable credit trends

The $176.7 billion-asset Citizens, in Providence, R.I., said that its consumer portfolio was holding up generally well amid the pandemic.

“While the economy is not out of the woods, while the banking system is not out of the woods, while our customers are not out of the woods, we are seeing some very encouraging return to life signs from our retail customer base,” said Brendan Coughlin, head of consumer banking.

Roughly 7% of Citizens’ consumer banking portfolio was in forbearance at the end of May, including 141,000 retail customers and 2,700 small-business customers.

Yet Coughlin said that 20% of customers in forbearance have continued to make their full, regular payments, indicating they most likely applied for forbearance as a precaution, rather than “a true sign of distress.” He also said the pace of new forbearance requests has slowed “dramatically” in recent weeks.

April and May also represented the first months during which Citizens had received more deposits online than it had inside its branch network.

“We believe this is a trend that's here to stay,” he said.

Coughlin added that “brick and mortar will not die,” but that the pandemic is likely to speed up broader strategic changes Citizens had already planned for its branch network.

“The consumer is going to reemerge from COVID in a very different place in terms of behaviors, and it's going to encourage financial services institutions and consumer banks to dramatically accelerate their strategic investments in digital,” he said.

Citizens is also still interested in a small, nonbank acquisition “that would advance our strategic agenda in a meaningful way,” Coughlin said. The wealth management business is particularly interesting to the bank right now as it leans into the affluent and mass affluent consumer segments.

But nodding to current events, he also said, “the present environment is challenged from an M&A perspective.”

Comerica: Middle market gets its sea legs

Texas and California middle-market business clients are asking Comerica to meet in person — a sign of how confident they are in the direction of the public health crisis and the economy, said Jim Herzog, chief financial officer of the $73.2 billion-asset bank.

“They see hope out there in the distance,” Herzog said. “They see where this thing’s going to wrap up and get back to normal at some point.”

Still, the rate of people who have tested positive for COVID-19 in Comerica’s home state of Texas has been increasing since late May. Dallas County hit a single-day record for new cases at 298 positive tests as recently as June 5, and hospitalizations reached a new high on Tuesday.

Herzog noted too that the reopening of Michigan’s economy, which is one of Comerica’s three big markets, is “clearly further behind” Texas and California but “improving each day.”

The economic mood has shifted, based on the amount of activity being handled by Comerica’s loan committee, said Chausse, the chief credit officer.

“When the stay-at-home orders went into effect and we were kind of in the heat of the COVID crisis, pretty much all activity at the loan committee level stopped,” Chausse said. “In the last three to four weeks, we have actually seen a pretty good pickup in activity in loan committee with requests from existing customers.”

Chausse said a lot of the 1,300 customers who received deferrals on about $4 billion in loan payments made the requests as a kind of insurance policy and before the bank was able to usher loans to them from the Small Business Administration’s Paycheck Protection Program.

“We have seen a number of customers continue to make payments even though we granted a deferral because they had the liquidity to do that,” Chausse said.

Regions: Where risks still lie

Nearly half of the credit card customers at Regions Financial Corp. who requested deferrals on their payments are still making them, and about one in four mortgage borrowers who received a forbearance are still making their payments too, CEO John Turner said.

“We’re seeing customers get the protection they think they could need but still demonstrate good discipline in terms of if they can, paying their loans to the bank,” Turner said.

The Birmingham, Ala., company estimates that 80% of the small businesses in the Southeast, where its bank typically does business, are now open.

“We’re beginning to see some positive things in the economy, but we continue to be very, very cautious about the speed of the recovery,” Turner said.

Barb Godin, chief credit officer at the $135.5 billion-asset Regions, sprinkled some cold water on the optimism during her remarks at the conference. Godin said there was still some risk still out there to the company’s energy and commercial real estate books, especially where restaurants, retail shops and hotels are prominent. What restaurants are open are operating at 50%, and while hotels have seen occupancy tick up, travelers are only just now starting to venture out, Godin said.

Godin added that Regions is risk-weighting its loans based on cash flows, regardless of whether the borrower gets a deferral, indicating the bank is taking a conservative approach to flagging any problems.

Truist: Fee income bounceback

At Truist Financial, bankers are going through larger business accounts one by one to determine which ones are hurting and what kind of help is needed to get through the pandemic-stricken economy.

Surprisingly, it’s not as bad as it could be, given the situation, according to Chairman and CEO Kelly King. He said the “vast majority” of the $506 billion-asset bank’s clients “are struggling” but “doing fine.”

“I’ve heard three times in the past 24 hours regional presidents and others say to me that clients are doing fine relative to what’s going on,” King said. Bankers have told King their clients' resiliency stems from the fact that they "got trained up well in the last crisis.”

Truist, of Charlotte, N.C., set aside $893 million in the first quarter to handle credit losses. King said there may be some reserve build in the second quarter, but probably not as much as in the first quarter.

Like its peers, Truist is facing considerable potential drag on profits. But King said there are bright spots such as cost-saving opportunities and areas of business that are “booming,” such as automobile and recreational vehicle loans and the bank’s insurance unit, the fifth-largest broker in the nation.

The mortgage business is “very, very attractive right now” and the capital markets and institutional business is “doing very well,” King said. Another positive for the bank: Fee income is “coming back strong” after a period of fee forgiveness in the early days of the pandemic, he said.

Truist was formed by the December 2019 merger of BB&T and SunTrust Banks. King said he’s been asked several times if he would have gone ahead with the deal knowing that the pandemic was coming.

In short: yes, he said.

He pointed to “huge revenue synergies” by putting the two banks together. The bank committed to eliminating $1.6 billion in annual expenses by 2022.

“We’re sitting in a really good position relative to the environment,” King said. “I wouldn’t want to be anywhere other than where we are now.”

PNC: Cautionary note

Demchak, the head of Pittsburgh-based PNC, said that most of the distress from the coronavirus shutdown is located in the smaller end of the economy, which is getting "crushed."

"All the deferrals we and the rest of the industry have done just by saying don't pay us, I think the pain shows up," Demchak said. "All of that has been hidden today."

The $445.5 billion-asset company is one of the largest handlers of commercial mortgage-backed securities debt in the U.S. and has a front-row seat to the kinds of cracks in credit its chief executive mentioned. About $2 billion in CMBS loans that PNC handles went into special servicing in the first week of June, Demchak said, meaning these borrowers have run into trouble and need a forbearance or some other kind of workout. Demchak estimated that by the end of the year, 15% of the servicing portfolio will have slid into special servicing.

"Maybe we all go work back to work and life is perfect and there isn't a second wave and so on and so forth," Demchak said. "But even in that instance, I think B-class retail hotels, unemployed coming out of government municipalities, health care — I mean there's big sectors that are in trouble here that are going to show up and play out through time."

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Crisis Management Coronavirus Commercial lending Small business lending Consumer lending Citizens Financial Comerica Bank Regions Bank Truist Financial PNC Financial Services Group