A trio of midquarter updates from midwestern banks showed that sluggish loan demand, both in the mortgage and commercial areas, are continuing to pressure profits, but not all banks are feeling the pain equally.
National City Corp. and KeyCorp, two Cleveland companies, both guided investor expectations for 2003 earnings lower on Wednesday. They both cited a slowdown in mortgage origination volume and sluggish commercial loan demand.
Fifth Third Bancorp of Cincinnati, however, said it is continuing to post double-digit percentage growth in commercial lending, which was mainly attributable to its winning away business from competitors.
In an 8K filing with the Securities and Exchange Commission, Fifth Third said it expects "low-double-digit" growth this quarter in the number of loans and leases in its commercial portfolio.
In recent quarters Fifth Third has consistently outperformed its competitors in expanding its loan book, thanks to a renewed emphasis on hiring commercial lenders. In the second quarter, the book was up 15% on an annual basis, a rate that has apparently held steady.
Executives have said in the past that the trend reflects its ability to take market share from competitors rather than increased loan demand from existing customers.
Fifth Third would not discuss its securities filing on Wednesday, but analysts described the information contained in it as consistent with figures from past quarters.
The company is "dynamite," said Gerard Cassidy of Royal Bank of Canada's RBC Capital Markets, and its ability to increase loans in periods of slow overall demand is "unparalleled in the industry."
Regional competitors have yet to generate a revenue boost from commercial lending that might offset the declining contribution from mortgage operations.
KeyCorp lowered its earnings outlook by 3 cents. Henry Meyer, its chairman and chief executive, told investors Wednesday at a New York conference sponsored by Lehman Brothers that he expects earnings this year to come "in the range of $2.10," 2 cents below the analyst consensus.
Commercial loan demand continues to be "very, very sluggish," he said.
National City disclosed a faltering mortgage business in its 8K filing, though Thomas A. Richlovsky, its treasurer, said in an interview that commercial loan demand is somewhat better than it was earlier this year. However, that will not be enough to affect earnings, he said.
Its commercial loan portfolio could actually shrink this quarter, because interest rates for such loans are still very low and customers are continuing to repay their existing loans.
"It's a [more] encouraging outlook" now than earlier this year, Mr. Richlovsky said, but "not in a radical or break-through way, but certainly in a more gradual way."
However, National City also said that mortgage banking revenues are slowing at a much faster rate than had been expected and that rapidly falling demand for mortgage refinancings, along with some uncertainty as to how the hedging of its mortgage servicing rights, would affect this quarter's results.
The company had been more bullish on its mortgage business earlier this year. Mr. Richlovsky conceded that it had underestimated how much the 10-year Treasury bond yield, the benchmark for mortgages, would rise.
According to Mr. Cassidy, second-quarter pipelines were so strong that many bankers and analysts were expecting earnings to hold up this quarter, but National City, like other banks, may have "underestimated how quickly demand fell off" after interest rates rose.
National City said it expects to earn around $3 per share this year. That would hit the lower end of the range of the 23 analyst forecasts screened by Thomson First Call. The consensus stands at $3.39.
Meanwhile, U.S. Bancorp reiterated an earlier profit forecast for the year. Earnings per share will likely rise 16 cents from last year, to $2, and revenue will grow between 4% and 6%, Jerry Grundhofer, the Minneapolis company's CEO, told investors at the Lehman conference, according to Bloomberg News.
Fifth Third also said in its filing that it expects mortgage revenues to fall "to levels similar to those seen in the fourth quarter of 2002."
National City had said in July that it planned to cut temporary staff quickly if applications fell, and in Wednesday's filing it said that it expects expenses to be "significantly" lower this quarter than they were in the previous two quarters. However, current mortgage production "will boost" costs "before such expenses decline in the fourth quarter."
Fifth Third's stock fell 1% on Wednesday, but shares of Key and National City were hit much harder. Key dropped 3.2%, and National City lost 4.8%.
