Before earnings season began, there was talk about a return to revenue growth as banks' loan problems eased. Lackluster second-quarter results like Marshall & Ilsley Corp.'s could kill that conversation.
The Milwaukee lender lost more money than expected as bad construction loans to Arizona and Florida home builders kept plaguing the $53.9 billion-asset company.
M&I's actions to stem losses through asset sales and writedowns continued to bear fruit in the April-to-June period, with delinquent loans falling for the fourth straight quarter. But M&I's anemic revenue is reinforcing fears that shrinking balance sheets and elevated credit costs could stymie the growth prospects of M&I and other troubled regional lenders as the economy recovers. The bulk of regional banks report earnings Wednesday and Thursday.
"The market has really switched its focus beyond credit [issues] to revenue growth," said Scott Siefers, an analyst with Sandler O'Neill & Partners LP. "The market hoped that the recovery might have been a bit quicker than it's actually playing out. The credit leverage story certainly isn't broken by any means."
Similar concerns were raised last week about several large banks' quarterly results.
For its part, M&I said it's on sound credit and revenue footing.
Total loan chargeoffs — while spiking from the prior quarter on higher real estate losses — were down roughly 15% from last year's average chargeoffs, said Greg Smith, M&I's chief financial officer. The amount of money the company set side to cover loan losses fell for the second straight quarter to the lowest level since late 2008.
They should continue "trending down" as fewer new loans went delinquent in the quarter than they had in two years.
"We're certainly past the peak of" nonperforming loan growth, Smith said. "I still think you are seeing some pretty good progress."
Revenue was softer than some analysts expected as loans continued contracting as they have for two years. But Smith said M&I's revenue was "stable" when taking into account two special items that drove it higher in the first three months of the year: one-time gains on debt repurchases and the sale of a merchant processing business.
Still, some market watchers were disappointed with M&I's noninterest revenue, which fell 24% from the prior quarter.
Anthony Davis, of Stifel, Nicolaus & Co., said M&I shares problems on the revenue front with a company that reported its results this week and that has been shedding assets to stanch losses, First Horizon National Corp.
The worry is that these companies and some of their peers may have cut too deeply to benefit from demand, however tepid, in some areas of commercial lending and better margins on cheaper funding costs.
"The whole company has to be managed. You just can't manage the remediation of problem loans. You just have to keep growing, too," Davis said. "The scale of the [loan shrinkage] is so large that it's neutralizing what growth they're seeing. Even though the margin was up, they're just not generating top-line growth. That is the hallmark of the whole group right now."
M&I is Wisconsin's largest bank, with roughly 190 branches in the state and more than 160 others in Florida, Indiana and Minnesota, among other places. The company has spent the last two years dealing with an ill-timed expansion into the Florida and Arizona home-building markets, and the latest quarter shows that the pain isn't over. Construction and development loan losses accounted for nearly half of its loan losses in the quarter.
Terry McEvoy, an analyst with Oppenheimer & Co., said M&I has several things going for it with respect to potential revenue growth. It has a diversified businesses with a treasury arm and healthy wealth management arm division that it has been investing in, he said. It has the top deposit share in Wisconsin and is positioned well to boost its share of loans and deposits there in and in adjacent markets, he said.
It won't be able to make gains in other areas until it fixes its lending problems, he said. Its second-quarter results indicate that hasn't happened yet, which is a disappointment to some investors and analysts.
M&I's shares fell 7.91% Tuesday, to $7.10.
M&I's results are similar to those of Zions Bancorp., which reported higher-than-expected chargeoffs this week, McEvoy said.
"A few quarter ago it was: credit, credit credit,' he said. "Now it's credit, credit, revenue — in terms of the three issues that people [are watching]. We're all aware of changes in overdraft fees and potential revenue challenges that will take some time to work through. Across the industry, it's premature to expect revenue this quarter," he said.
First Horizon's chief executive, D. Bryan Jordan, said during a quarterly call last week that First Horizon has a simple plan to boost its performance. "Near-term, modest organic growth, credit cost reduction and efficiency improvements will likely drive our bottom-line improvement," he said.
Zions reported loan originations of $1.8 billion, up 30% from the first quarter. But while Zions Chairman and CEO Harris Simmons said the company was encouraged with the "significant increase" in new loan originations, that wasn't nearly enough to offset paydowns and chargeoffs.