Show me some solutions already.
That has to be the sentiment among bankers after hearing each other grouse during the first week of earnings season about the commercial lending funk, doubts over how swiftly Congress may cut taxes, risks in auto lending and other concerns.
Unfortunately, no one has offered a magic-bullet workaround. But in comments in recent days from executives of BB&T, KeyCorp, Citizens Financial and other regional banks, a kind of patchwork approach has emerged: capitalize on the viable lending niches in your respective markets, make some cuts or rein in risks here, invest there … and be patient.
“You have all these banks taking different strategies to differentiate themselves from the market and to put on loans that have attractive, risk-adjusted returns,” said Terry McEvoy, a bank analyst with Stephens Research. “That means some banks are growing auto, and some banks are shrinking auto. Some banks are growing real estate, and some banks are shrinking real estate.”
Banks are cutting their costs and biding time for further interest rate hikes to keep driving up margins and translate into “real organic growth,” he said.
“It’s very much a waiting game,” McEvoy said.
Here is a sketch of some strategies, based on comments from the management teams trying to develop them amid changing economic times.
Commercial lending sanctuaries
Not all pockets of business lending are slowing down, according to several banks that counted commercial and industrial and middle-market lending as bright spots in reporting quarterly results Thursday.
Citizens, of Providence, R.I., said it has seen encouraging signs in dealings with midsize businesses — a category generally defined as those with annual revenue between $10 million and $500 million.
Echoing comments by executives of other regional banks — including U.S. Bancorp and Comerica — Citizens said that its roster of midsize clients is growing. Whether those relationships turn into credits, however, remains to be seen.
“Our pipeline in our midmarket business is actually quite strong, and the question is, what closes, and when does it close, and how does demand continue to materialize?” said Donald McCree, head of commercial banking at the $150 billion-asset Citizens.
Overall, commercial loans rose 8% from a year earlier, to $51.9 billion, but were flat from the previous quarter. Credit line utilizations have increased “slightly” but “not in a material way,” McCree said.
Meanwhile, larger corporate clients have held off on borrowing in recent months, turning instead for financing to the capital markets. In some cases, the company parlayed the shifting preferences of its customer base into a stronger source of capital markets fees.
“You can see that in our fee lines, as we captured some of that opportunity,” McCree said.
Capital markets-related fees rose 92% from a year earlier to $48 million.
At Cleveland-based KeyCorp, average loans increased 43% from the year-ago quarter —largely driven by its acquisition of First Niagara Financial, but also due to growth in C&I loans. While KeyCorp executives say they detect a renewed optimism among business clients, they acknowledge that policy uncertainties are holding back some clients from acting on it in broader commercial lending categories.
“We have seen line utilization remain relatively consistent now for several quarters,” KeyCorp CEO Beth Mooney said in a call Thursday with analysts. “But there is a level of emerging confidence that, I think if it is met with some level of fiscal stimulus, as well as other legislative and tax reforms out of Washington, could translate into increased and heightened activity.”
Total loans at BB&T, of Winston-Salem, N.C., fell slightly from the end of 2016, to $144 billion, with declines in areas such as C&I loans, direct retail lending and sales finance.
But Chairman and CEO Kelly King said it’s the result of an effort by the $221 billion-asset company to endure short-term pain in the interest of long-term gain. For instance, BB&T is letting loans run off in areas such as sales finance and residential mortgages where management has become concerned about terms and pricing relative to the inherent risk in those portfolios.
“We’re reducing exposure from other loans, given the low profitability and uncertain market outlook,” King told analysts on a conference call. He sounded more optimistic about BB&T’s “core” lending areas such as commercial lending, commercial real estate and revolving credit.
“Obviously we're trying to grow the more profitable loans with better risk profiles,” he said, adding that management has reversed its projections for this year from “slightly down” to 1% to 3% growth. “But this will take a little time to happen.”
Cutting here …
One of the tougher parts of the waiting game for big banks is balancing cost control with growth efforts such as investments in new business lines or M&A.
KeyCorp has managed to control the expenses associated with its acquisition last year of First Niagara. The deal added more than 1 million new retail and business customers to its books, and KeyCorp was able to grab market share in areas like upstate New York, the company said.
Yet as part of the transaction, KeyCorp has completed 106 planned branch consolidations, reduced nonbranch space by 225,000 square feet and exited more than 200 vendor relationships.
BB&T has devoted a lot of attention to cost control, including branch closures and reductions in teller staff. The company, which closed about 2% of its branches last year, expects to shutter about 100 more in 2017.
Management is paying close attention to customer retention as it closes offices.
“We're monitoring that pretty closely,” Chris Henson, BB&T’s president, said during the call.
“We don't see a lot of loss of business.”
BB&T has also been keeping track of customers migrating to digital channels. Henson said that 60% of the company’s 4.6 million retail clients are using its digital platform, while about half of its business clients have made the move.
“It gives us a really good platform [to] of offload some of these branches, frankly,” Henson said.
… And investing there
But these banks are making investments at the same time, too.
Citizens remains bullish on consumer lending and said not to be fooled by its scaling back in auto lending.
“We probably peaked at $14 billion in total loan balances, and I think that will probably be lowered by about $1 billion, and I would expect that trend to continue into next year,” said CEO Bruce Van Saun.
The primary reason the company pushed into auto lending — a business that has recently stoked credit fears — is that, for years, it was the only category of consumer lending that was growing at a reasonable pace, Van Saun said.
Over the last few years, however, consumers have gotten their “mojo back,” Van Saun said. Citizens, as a result, has chosen to focus more closely on other types of consumer lending, such as unsecured lines of personal credit.
Returns from personal loans are “accretive much faster” than credit cards, according to Van Saun. Additionally, the move into personal loans allows the company to sidestep the “heavy marketing expenses,” as well as the cost of credit card promotions such as balance transfers, he said.
Citizens currently has an agreement with Apple to provide financing to consumers who want to upgrade to new version of the iPhone. It has also recently signed similar agreements with Vivent, a home security company, as well as HP.
“Stay tuned, because there could be more in the works,” Van Saun said.
During the first quarter, total loans in the company’s consumer bank grew 7%, to $57.3 billion, due to a mix of higher education, mortgage and unsecured retail loan balances.
BB&T continues to invest in technology, with Henson estimating that the company will spend $400 million to $500 million on tech initiatives this year. While most of those funds are going toward compliance, he said the goal over time is to “tweak” allocations to spend more on discretionary technology.
The company, for instance, is slowly doing more with artificial intelligence and robotics, though King said those efforts are in the very early stages. He noted, however, that BB&T has applied AI to its financial reconcilement area, discovering that the system took 15 minutes to handle a process that would take a human two hours to complete.
“So we are engaging some people who specialized in these areas to help us,” King said. “Over time, we'll learn how to do it ourselves.”
BB&T is also investing more in its digital platform and is looking to do more advertising on social media, King said.
KeyCorp said it would continue to build out its residential mortgage platform acquired along with First Niagara, of Buffalo, N.Y., and take advantage of its expanded lineup of bankers on the East Coast.
“On the residential mortgage side, we really didn't have this as a true product offering throughout the Key footprint, and each one of those Key customers probably have a mortgage loan, but we want to be top of mind for when they look out to buy the next house or when they want to refinance,” Chief Financial officer Don Kimble said. “So this is really getting to a point where we are successful in getting our share of the market as opposed to creating a new product or offering.”
The mortgage effort is still in the early stages, Kimble said, but KeyCorp officials are optimistic about the future.
“We are just … starting to see some of the early seeds as far as those opportunities,” he said.