Fifth Third Bancorp and Huntington Bancshares Inc. share a headquarters state (Ohio) and a lot of the same problems (consumer and commercial loan losses).
But second-quarter results released Thursday brought into sharp relief the differences between the two companies particularly the progress each has made on dealing with its credit problems.
The $51.4 billion-asset Huntington, of Cleveland, is more exposed to northern Ohio, which has been hit harder by a downturn in manufacturing than Fifth Third's turf in the southern part of the state. Fifth Third has also been an industry leader in reserving for losses. Consequently, Huntington is further behind its Cincinnati cohort on the road to recovery.
"They're just going to have to slog through this until they get to a better economic environment," said Anthony Davis, an analyst with Stifel, Nicolaus & Co.
Fifth Third's credit quality is slowly mending. However, analysts said the $116 billion-asset company is still grappling in its Michigan and Florida operations.
"We expect loan losses to increase moderately in the third quarter, with higher commercial real estate chargeoffs partially offset by lower consumer chargeoffs," Fifth Third Chairman and Chief Executive Officer Kevin T. Kabat said in a conference call Thursday.
Most of its loan losses continue to be driven by commercial and residential real estate loans concentrated in Michigan and Florida, Kabat said.
Still, Fifth Third's credit-quality readings were in line with or beat analysts' estimates.
Its provision for losses rose 35% from the first quarter and 45% from a year earlier, to $1 billion. Chargeoffs rose 28% from the first quarter and 82% from a year earlier, to $626 million.
Nonperforming assets rose 4.6% from the first quarter and 65% from a year earlier, to $3.2 billion, or 3.48% of total assets.
"Management is well ahead of peers in identifying problem credits and loss content, having already realized $3.5 billion in net chargeoffs in the past five quarters," Robert Patten, an analyst at Regions Financial Corp.'s Morgan Keegan & Co. Inc., wrote in a note to clients Thursday.
Moreover, Fifth Third has maintained relatively healthy capital ratios and has been a leader in building its loan-loss reserve ratio, which was 4.28% at June 30, versus the median of 1.99% at March 31 for the banking companies Morgan Keegan follows, Patten wrote.
Dennis Klaeser, a senior analyst at Raymond James & Associates, said that looking at Fifth Third's complete credit-quality mix, the growth rate of problems clearly is diminishing.
"But there's still reason for cautiousness, particularly in the commercial real estate sectors," Klaeser said.
"Given the size of the provision," he said, "management still feels its important to build the loan-loss reserves."
Fifth Third made $856 million, or $1.15 per diluted share, in the second quarter after paying preferred dividends.
Most of the profit came from a $1.8 billion gain on the sale of a processing unit.
Were it not for that one-time gain, analysts said, the company would have reported a net loss to of 32 cents to 40 cents a share, slightly lower than the per-share loss of 34 cents that analysts on average had estimated, according to Thomson Reuters.
On Thursday, Huntington said it lost $182.5 million, or 40 cents a share, in the second quarter after paying preferred dividends. Analysts on average had estimated a loss of 18 cents a share, according to Thomson Reuters.
In a conference call Thursday, Huntington's CEO, Stephen Steinour, said the company does not expect any material turnaround in the economic conditions in its markets this year.
"We expect our commercial loan portfolio will remain under pressure as we continue to believe the economy will remain weak for the rest of the year," Steinour said.
As a result, chargeoffs, provision expense and loan-loss reserves will likely remain elevated, but they will be "manageable," Steinour said.
Huntington's provision for credit losses rose 42% from the first quarter and more than tripled from a year earlier, to $413.7 million.
Chargeoffs fell 2% from the first quarter (though total loans also declined) but rose more than fivefold from a year earlier, to $334.4 million. Nonperforming assets rose 13% from the first quarter and more than tripled from a year earlier, to $2 billion, or 5.18% of total assets.
Davis said he was encouraged that Huntington's cash collections related to its earlier exposure to Franklin Credit Management Corp. were up from the first quarter.
In March, Huntington announced a restructuring that essentially quarantined its remaining exposure to the troubled Jersey City subprime mortgage lender and servicer.
Davis said he was also encouraged by the slowing rate deterioration in Huntington's consumer loans, particularly in auto and home equity.
But he remained concerned about the increasing deterioration in the company's commercial and commercial real estate portfolios.
"Clearly both commercial and commercial real estate are really being impacted by northern Ohio and Michigan, which is some of the most depressed Midwest markets," Davis said.
In particular, Cleveland's current unemployment rate is 10% and Detroit's, 14.9%.
"We applaud what management is doing in terms of taking aggressive action in terms of bolstering capital, building liquidity and addressing credit challenges," Davis said. "But, like most banks, Huntington is racing against the economic clock here."
While the second half of the year may prove better than the first, Huntington's earnings will still be under pressure as credit trends continue amid slow loan demand, Davis said.
Thanks to capital-raising efforts at both Fifth Third and Huntington, both companies' capital ratios have improved from the first quarter.
Fifth Third's Tier 1 and tangible common equity ratio at June 30 were 12.9% and 6.96%, respectively.
Huntington's Tier 1 and tangible common equity ratio at June 30 were 11.86% and 5.68%, respectively.