Banks aren't lending? Tell that to M&T Bank Corp. and Hudson City Bancorp Inc.
Those regional banks — among the healthiest in the nation — were a rarity in the fourth quarter: banks whose loan books actually grew. Marshall & Ilsley Corp., in turn, followed a trend set by most other U.S. lenders last year, shrinking its loan portfolio as it tries to return to profitability.
While politicians and media pundits criticize banks for being tight with credit, market watchers say that the industry is actually diverging between institutions that have the financial heft to keep lending and those that can't because they're still mired with credit issues. M&I could be a case study for problem banks, reining in credit as it sheds money-losing construction loans in troubled markets like Arizona. Active lenders like M&T and Hudson City, meanwhile, are poised to take share from weaker players when the economy rebounds and loan demand picks up, observers say.
The banks' latest quarterly reports, released Wednesday, show that "despite all the rhetoric, that banks are making loans — that there is some growth," said David Dietze, president and chief investment strategist with Point View Financial Services Inc. "Banks who had better portfolios, and who maintained stronger tangible common equity, are indeed being inspired by the wide profit margins to in fact make loans."
M&T and Hudson City — which have both had profit growth through the recession — said their loan books have swelled as a result of low interest rates and cheap funding costs.
At M&T net loans rose 5.9% from a year earlier, to $51.06 billion, with gains in real estate and consumer lending. Hudson City's loans rose 7.7%, to $31.72 billion, mostly due to rising originations of first-lien loans to single-family homebuyers.
"We have been the recipient of more demand, I guess, than most. The reason being we've had the tangible common equity to support it," Ronald Hermance, Hudson City's chairman and chief executive, said in an interview. "This is pretty much what the administration asked banks to do — to get in there and lend more. It's a profitable business for us."
Hudson City's key business involves making tightly written loans to well-to-do homeowners in the New York region. It has continued making money by steering clear of high-risk financial products like adjustable rate mortgages and mortgage-backed securities.
Hermance said most of his company's $6 billion in new originations last year came from people who bought homes at the height of the real estate bubble and sought out Hudson City to refinance at favorable rates. Other lenders in its area have reined in lending to preserve capital, he said.
"There hasn't been too many folks growing — and that's where we have jumped into the middle of the market and tried to make a difference," Hermance said.
Hudson City's loan growth in 2010 hinges on which way rates move and its level of principal repayments, which spiked last year, the CEO said. The uncertain regulatory environment could also be a factor. Hudson City may consider reining in lending or exploring the sale of loans should it become subject to the new bank tax proposed by the Obama administration, Hermance said.
"For doing what the administration asked — which is lending more money — we qualified for a tax. That doesn't seem right," Hermance said. If the proposal becomes reality, "we'll have to consider why making loans makes sense."
Several miles north, M&T, of Buffalo, has also benefitted from an upheaval in the lending markets.
"We had pretty good growth in loans year over year in our community banking footprint," said Rene Jones, M&T's chief financial officer. "What we're seeing is new relationships come into the fold."
Like Hudson City, M&T has thrived by playing it safe. M&T tends to underwrite conservatively; it has had relatively low losses in its sizable commercial real estate book. M&T seems to have learned from its mistakes by identifying and containing other troubled loan categories early, as it did a couple of years ago with auto lending. "They haven't pulled back — what they are waiting for is the demand in the marketplace to just come back," said Marty Mosby, an analyst with FTN Equity Capital Markets.