Looking for a bright spot among regional banks' so-so results in the first week of earnings season?

Try fee income.

M&T Bank, PNC Financial Services Group and KeyCorp reported increases in noninterest revenue approaching 10% in the second quarter, while three of the four megabanks suffered declines.

Fees are a crucial income source for banks right now. Loan spreads will remain thin until the Federal Reserve raises interest rates; loan-loss reserve releases that pad bank bottom lines have almost run their course; and banks' cost-cutting efforts have nearly hit bone.

"If we can't get it in loan growth, we'll get it in fees," Richard Davis, U.S. Bancorp's chairman and CEO, told analysts on a conference call this week.

The upswing was the fruit of superregional banks' long-term efforts to win investment banking and wealth management market share, said Marty Mosby, an analyst at Vining Sparks. These banks are "starting to get their arms around" services that they used to struggle with, he said.

An improving economy — which has strengthened mortgage-banking, card and debit-account fees — certainly contributed to the fee growth , Mosby said.

But on the commercial side especially, companies such as SunTrust Banks , KeyCorp, PNC and M&T have built out their investment-banking capacities over the past several years and are now reaping the reward. Several Wall Street investment banks failed in the crisis or were consolidated later, leaving more room on the field for regional competitors.

"Commercial customers want to utilize a broad relationship with their bank, and these superregional banks can now handle all their lending, transaction processing and investment banking," Mosby said.

SunTrust CEO Bill Rogers said as much as in a conference call with analysts Friday after the $189 billion-asset bank reported strong linked-quarter and year-over-year fee growth.

"Our continued focus on meeting more client needs has generated positive momentum with regard to noninterest income and deposits," Rogers said. "We have further opportunity here."

A Sandler O'Neill and Partners research note described as "impressive" the 7% increase in fee income at Atlanta-based SunTrust from March 31 to June 30. Strong retail-investment and investment banking revenue more than offset declines in mortgage fees, the note said.

Other regionals had similar stories from the second quarter to crow over.

Regional Roundup

At the $97.1 billion-asset M&T in Buffalo, N.Y., fee income rose 9% to $497 million, boosted by the sale of the trade processing business of the Institutional Client Services unit at its Wilmington Trust unit. Higher mortgage banking revenue and loan syndication fees also boosted fee income.

"We are still looking for low-single-digit, year-over-year growth in fee revenue," Chief Financial Officer René Jones said during a conference call. "Our wealth advisory services and institutional client services business[es] [at Wilmington Trust] are going very nicely."

PNC in Pittsburgh reported fee income rose 7.9% to $1.81 billion on higher corporate service fees, asset management revenue and consumer service fees. PNC also recorded higher gains on sales of Visa class B common shares, compared with a year earlier.

"We want to be less dependent long-term on net interest income … and be able to get back to a more historical balance that we used to run at in terms of fees and net interest income," Chairman and CEO Bill Demchak said during a conference call.

To offset lower rates of commercial-and-industrial loan growth, the $354 billion-asset PNC has boosted services that generate fee income. While PNC's second-quarter profit fell from a year earlier, the decline would have been worse without its 8% year-over-year rise in noninterest income.

"I don't know what is going to change to cause pure middle-market lending-only relationships to be any more attractive, which is why we are focused so much on growing fee income in the cross-sell relationship," Demchak said.

KeyCorp in Cleveland reported higher second-quarter earnings, largely as its fee income surged from a rise in trust and investment services and investment banking and debt placement revenue. Overall, noninterest income makes up roughly 45% of the company's revenue.

Trust and investment services income increased 18%, to $111 million, from a year earlier, while investment banking and debt placement fees rose more than 42%, to $141 million.

The strong second-quarter reflected the "variability in some of our businesses that we've previously discussed, like investment banking and debt placement," said Don Kimble, the $94.6 billion-asset company's CFO. Still, management expects this area to "be one of the key drivers of our mid-single-digit growth in fee income," he added.

There should be some quarterly volatility to investment banking so it is more important to see how it is doing over the long term, said Chris Gorman, president of KeyCorp's corporate bank. Overall management expects it to grow even if there are some down quarters, he added.

Investment banking is one area where KeyCorp is trying to differentiate itself from its competitors and snag more business from clients. It has beefed up its capabilities with the addition of Pacific Crest Securities, a technology-focused investment banking firm, last year.

There is a "multiplier effect" of being involved in M&A discussions with customers because "if you can break into these clients with a strategic idea and you're hired as their adviser, loans, deposits, hedging, a lot of those things come with it," Gorman said.

Big-Bank Blues

Sledding was rougher for the big banks, especially because of market volatility and consumer finance challenges.

Bank of America's consumer-banking unit's fee revenue improved slightly, due to higher card and mortgage-banking income. But its overall fee income fell 1% year over year, to $11.6 billion, with executives blaming lower equity-investment income, lower gains on sales of securities and "modest" declines in trading and investment banking fees.

Wells Fargo reported gains in trust and investment fees, card fees and insurance fees. But a 21% decline in trading and gains from debt and equity investments hurt fee income, CFO John Shrewsberry said.

"We had strong diversified fee growth across our other fee categories demonstrating growth from doing more business with our customers," Shrewsberry said. "Many of our other customer-facing businesses generated higher fee income."

Wells' noninterest income fell 2.2% to $10 billion in the second quarter from a year earlier.

Citigroup outshone its megabank rivals with a 2% gain in noninterest income. However, a quarter of lackluster fee income from cards has persuaded management to make some changes. In its North American consumer business, card revenue dropped 5% from a year ago, to $1.9 billion, due to a decline in average loans.

Citi is now planning to invest more heavily in marketing in order to reverse the downward trend, CFO John Gerspach said.

"We've got a world-class product offering and we need to put some marketing dollars behind that," he told reporters Thursday. Revenue will likely remain tough through the end of the year, though, as the new investments kick in, he said.

Part of the problem is that until recently, Citi used to offer a wide range of cards and many of them had low market share, said Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods. Citigroup CEO Michael Corbat said Thursday the company has recently "completely restack[ed]" the card offerings, and to take advantage, "we need to put a little bit more marketing dollars at work."

Citi's pending deal to take over from American Express the exclusive card relationship with Costco should help, and that relationship is set to begin next April 1.

No Room for Complacency

Yet even regional banks cannot rest on their laurels as fee-income calculations are variable and complex.

U.S. Bancorp's experience is a good example. It reported a 7.6% jump in trust and investment management fees in the second quarter compared with a year earlier. But the $419 billion-asset Minneapolis bank had lower loan fees due to the wind-down of a checking account advance product, and an accounting-related change trimmed mortgage banking revenue.

Overall, noninterest income rose 1.9% to $2.3 billion in the second quarter from a year earlier, excluding a one-time sale of Visa shares from the year-earlier period.

Jackie Stewart, Andy Peters, Paul Davis and Dean Anason contributed to this story.

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