By Rachel Louise Ensign
Who needs a rate hike?
Faced with prolonged low interest rates, Main Street banks are
boosting profits by lifting fee income and slashing expenses,
leading some of their shares to postcrisis highs.
Columbus, Ohio-based Huntington Bancshares Inc., for instance,
on Thursday posted a record profit for the second quarter that beat
Wall Street expectations as fees from mortgages grew by double
digits. Shares rose about 1.1% after the report, to $11.73, their
highest levels since early 2008, according to FactSet.
Huntington Chief Executive and Chairman Steve Steinour thinks
that the bank can thrive even as low rates are forecast to keep a
key metric of lending profitability down.
While rate increases from the Federal Reserve would help the
bank, "our execution is not dependent on a rate increase," Mr.
Steinour said Thursday. "We control our destiny."
Huntington and other regional-bank stocks have helped the KBW
Bank Index, a measure of large U.S. bank stocks, climb to its
highest point in nearly seven years. The index includes most of the
larger regional banks as well as the biggest U.S. firms like J.P.
Morgan Chase & Co.
On top of strong earnings, investors may be piling into the
stocks as a way to bet on rates rising, said Bill Carcache, an
analyst at Nomura Securities.
But the Federal Reserve hasn't lifted rates yet, and that means
net-interest margin, a key lending-profitability metric, remains at
very low levels at regional lenders. The measure tracks how much
banks earn when they borrow from depositors and then lend or invest
those funds.
With lending profitability crimped, these banks are increasingly
"controlling the things they can like fee growth and expense
control," said Mr. Carcache.
That effort was reflected in their recent second-quarter
earnings. PNC Financial Services Group Inc. said last week that fee
income grew 8% from a year earlier on services such as asset
management, while SunTrust Banks Inc. said its investment-banking
business brought in 22% more money than a year before.
"We're very interested in growing fee-based businesses," PNC
Chief Executive Bill Demchak said at a conference in May. "I don't
like...needing to rely on the balance sheet to show earnings
growth."
Huntington on Thursday reported that mortgage-banking income
surged 70% in the second quarter, driving a 13% rise in overall
noninterest income. Improved volume helped push the mortgage
business higher; it also benefited from a hedging-related gain.
That business represented about 14% of second-quarter fee-based
income and offset declines in fee revenue from service charges on
deposit accounts and brokerage income.
These banks are also trying to become more efficient by cutting
expenses. PNC increased its target for cost-cutting by $100 million
to $500 million for the full year of 2015. Fifth Third Bancorp said
in June that it plans to consolidate or sell about 100 of its
branches and about 30 other properties and the moves are expected
to save about $60 million a year.
Of course, regionals won't be unhappy when rates rise. When
asked about the topic recently, BB&T Corp. Chief Executive
Kelly King's said: "I dream about it every night."
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