Regional Banks Bemoan Lack of Lending
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By MATTHIAS RIEKER / WSJ April 22, 2010
For large regional banks, the bread-and-butter business of lending remains challenging.
The loan books at a string of regional banks reporting first-quarter results continued to shrink. The banks' earnings from the lending business hardly fared any better.
Bankers continue to bemoan the lack of what they consider credit-worthy borrowers taking out loans that would lift lending income and brighten the revenue outlook for future quarters. Borrowers aren't even doing much to tap their existing lines of credit.
The enervated condition of regional banks, and their resulting lackluster earnings, stand in contrast to the buoyant profits earned by big banks. But for companies such as J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc., those profits were powered by their Wall Street operations, which the regional banks largely lack.
The irony for regional banks is that their loans are drying up just as the potential profit from lending is high, mainly because banks can borrow cheaply. Customers deposited more money in deposit and savings accounts in the first quarter, and banks paid less interest on those deposits, improving the profit margins of regional banks' lending business. The cost for troubled loans, meanwhile, fell, requiring banks to put less money aside to cover losses from delinquent loans—though losses from commercial real estate remain a headache.
"Loan growth is off to a weak start," Keefe, Bruyette & Woods Inc. wrote in a report summarizing the first 28 earnings reports of the banks it follows.
At Wells Fargo & Co., interest income, which is mostly the spread banks earn on making loans, declined 7.6% from a year earlier, to $13.2 billion. "We would love to see more loan demand," Chief Financial Officer Howard Atkins told investors. Wells' first-quarter profit fell 16%, to $2.5 billion.
At smaller competitors, the trend looks hardly more encouraging. Jim Wells, the CEO of SunTrust Banks Inc. in Atlanta, said that "loan demand has yet to pick up as clients are focused on capital preservation and debt reduction." Net income fell 9%, to $1.6 billion, and loans declined 8%, to $114 billion.
At KeyCorp in Cleveland, lending income fell 8.7%, to $892 million, while loans declined 20%, to $56 billion; and at Comerica Inc., a mainly commercial lender in Dallas, interest income fell 15%, to $476 million and loans declined 16%, to $40.8 billion.
SunTrust reported a first-quarter loss of $161 million, compared with an $815 million loss a year earlier; KeyCorp narrowed its loss to $55 million, compared with $488 million a year earlier. Comerica's profit rose to $52 million, including a $17 million one-time gain.
Of course, bankers have been accused during the financial crisis of not lending enough, and of tightening conditions for new loans. In January, the Federal Reserve said banks "have yet to unwind the considerable tightening that has occurred over the past two years."
Bankers, meanwhile, argue that they have had to preserve capital to survive the credit crisis. Some bankers, including Comerica's Chief Financial Officer Elizabeth Acton, said low utilization rates have stabilized. "Whether that's continuing we'll have to see. But a lot of our loan decline has been through less usage" of lines of credit.
There is some evidence, if only anecdotal, that the long dry spell is coming to an end. J.P. Morgan said last week it already sees a significant pick-up in loan demand from small business borrowers. Comerica Inc. Chief Executive Ralph Babb told investors Wednesday that the bank made more middle-market loans in Michigan in March "than we've had in any month since 2008."
"Theres a renewed sense of optimism" in Michigan, he said, but loans won't "grow in any kind of a robust fashion."
J.P. Morgan Chairman and CEO Jamie Dimon said during a conference call with reporters last week that most middle-market borrowers don't need credit yet. But many plan to hire, he said, and borrowing "might go up soon." |
