Fee income has been a tough nut to crack lately. As third-quarter earnings season nears its end for larger banks, one of the looming questions is how they will compensate for sluggish mortgage banking income in the coming months.
For many regionals, noninterest income in the quarter was choppy and often characterized by a push and pull between healthy capital markets income and flat or falling mortgage banking income. Regulatory pressures and changing consumer behaviors have also helped push down deposit service fee income, said Chris Marinac, an analyst with FIG Partners in Atlanta.
Recent market volatility portends a good fourth quarter for banks with a capital markets business, Marinac said, but this might also be as good as it gets for a little while.
“The second and third quarters are your best quarters of the year, so when you get into the fourth quarter and first quarter, that’s when you seasonally slow down,” he said.
Regions Financial in Birmingham, Ala., for example, reported strong growth in its capital markets business that contributed to a 7.7% increase in fee income year over year. Some banks relied on different offsets. For example, fiduciary and asset management fees helped the $32 billion-asset Synovus in Columbus, Ga., overcome a decline in mortgage banking, as overall noninterest income rose 6.7% to $13.5 million.
Yet nothing can be taken for granted. Results from capital markets units — which help corporate clients raise capital and restructure debt and provide other services — can be lumpy and swing based on client sentiments about the economy.
The picture for mortgage banking revenue is considerably bleaker. With interest rates rising, mortgage banking income is likely to stagnate or decline in step with originations.
“Interest rates are higher, refinance activity is dead, and generally we’re coming into a period where there probably is going to be less mortgage origination just driven by higher interest rates,” Marinac said. “The economy is still good enough that there is going to be purchase business, but it’s most likely going to be at a lower pace.”
Going forward, most regional banks will be challenged to offset that falling mortgage revenue in one way or another. Here’s a look at the fee income story for a handful of regionals that reported quarterly results Tuesday — and what might give earnings a much-needed lift into the next quarter and year.
Fifth Third
Overall fee income fell 64% to $563 million for the $141.7 billion-asset Fifth Third Bancorp in Cincinnati. Some of that decline was related to a one-time charge of $14 million related to a swap transaction.
Otherwise, the drop in fee income was led by a 22% decline in mortgage banking income to $49 million and a 1% decline in corporate banking revenue to $100 million. Wealth and asset management revenue rose 12% to $114 million. Service charges on deposits and card processing revenue also improved. As a result, when one-time factors are excluded, Fifth Third's noninterest income rose 2.6%.
Mortgage banking revenue remains challenging for most of the industry, President and CEO Greg Carmichael told American Banker. Although corporate banking revenue dipped a little in the quarter, he said the capital markets business had a strong pipeline going into the fourth quarter and that he was confident that business would boost fee income into 2019.
“We can play on both sides of the fence now where we couldn’t years ago,” Carmichael said. “We benefit when our customers want to use capital markets, and we benefit when they don’t by lower payoffs and paydowns and stronger utilization rates.”
Regions
A bank like the $125 billion-asset Regions has figured out the right mix to generate strong fee growth despite middling mortgage banking income.
Fee income grew across most of Regions’ business lines, except mortgage. Regions had especially strong performance from card and ATM fees, which climbed 7.8% to $111 million, and from capital markets, which rose 28.6% to $45 million.
Regions is seeing a significant portion of its fee growth from lending relationships with large commercial real estate developers and landlords, CEO John Turner said during a conference call with analysts Tuesday.
“We did reach a point in the second quarter when we began to … have an opportunity to win a few more commercial mortgage opportunities,” Turner said.
“And with that comes a full relationship. … We pick up opportunities to generate fee income through our capital markets” and other fee-based products, he said.
F.N.B.
Some banks were lucky enough to get a boost from mortgage banking in addition to other fee-based services. The $33 billion-asset F.N.B. in Pittsburgh reported 5.4% yearly growth in noninterest income to $74.8 million. That was led by a 9.7% increase in mortgage banking income to $6 million.
“The increases were nice. I mean, it was really across the board,” Chief Financial Officer Vincent Calabrese said on the bank’s quarterly conference call Tuesday. “There were contributions from the whole footprint.”
F.N.B.’s fee income has gotten a particular boost from its March 2017 acquisition of Yadkin Financial in Raleigh, N.C., notably from interest-rate swap derivative products, Chairman and CEO Vincent Delie said on the same call.
Huntington
Like many others, Huntington Bancshares in Columbus, Ohio reported a sizable year-over-year drop in mortgage banking income (down 9%) during the third quarter. Unlike most of the others, though, growth in Huntington’s other fee business lines more than offset the shortfall.
Overall, noninterest income at the $97 billion-asset regional rose 4% from the same three-month period in 2017, totaling $342 million. The gain was spread across all of Huntington’s fee categories – apart from mortgage banking – and CFO Howell D. “Mac” McCullough said to expect more of the same in the fourth quarter.
“I think capital markets will continue to have a good year,” McCullough said Tuesday in a conference call with analysts. “I think you’re going to continue to see growth in card and payment processing revenue, with the growth in households that we see on the consumer side, [and] good growth in deposit service charges as well. … I think we're in good shape as we think about some of the lines that are performing well. Trust and investment management is another.”
Huntington’s third-quarter mortgage banking revenue was still substantial, coming in at $31 million.
John Reosti contributed to this article.
