U.S. regional banks are competing harder for commercial lending and may cut more jobs after leaning on a drop in credit costs to improve earnings.
"We're getting to the point where there's not a lot left to speak of," R. Scott Siefers, an analyst at Sandler O'Neill & Partners LP, said of the lenders' ability to continue reducing provisions for soured loans to bolster profit. Headcount reductions are the most efficient way to cut costs as they account for about half of a bank's expenses, he said.
Third-quarter revenue at four of the five biggest regional lenders — Regions Financial Corp., PNC Financial Services Group Inc., BB&T Corp. and SunTrust Banks Inc. — dropped about a combined 5 percent. Revenue may hold steady or decline for the next two years if interest rates fail to rebound, said Brian Foran, an analyst at Nomura Holdings Inc. in New York.
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"A lot of people are looking to 2013 as the big head-scratcher for bank estimates right now," Foran said.
The lenders mitigated the revenue declines by setting aside less money to cover bad loans as fewer borrowers defaulted. BB&T, the ninth-largest U.S. bank by deposits, reserved 68 percent less for soured loans in the third quarter, compared with 46 percent for Pittsburgh-based PNC and 53 percent for Regions, based in Birmingham, Alabama.
Net revenue at U.S. Bancorp climbed 4.5 percent in the third quarter, and the Minneapolis-based company was the only one of the top five to post an increase.
'Very Tough Road'
"This group is so heavily tied to the macro environment and the interest-rate environment that until you get something a little easier or a little better at that level, this is going to be a very tough road for the banking space," Siefers said.
The regional banks are turning to commercial lending as declining wages and unemployment stuck above 9 percent continues to pressure U.S. consumers.
"Everyone's crowding into the commercial and industrial lending space," Siefers said.
Average commercial loans at U.S. Bancorp climbed 12 percent in the third quarter from a year earlier. Total commercial loans, excluding real estate, advanced 17 percent at PNC.
Regions, which posted a 13 percent increase in commercial and industrial loans, expects continued growth "even as economic uncertainty weighs on customer confidence," Chief Executive Officer Grayson Hall, 54, said in an Oct. 25 conference call.
The burgeoning competition may make it harder for banks to wring profits from their expanding commercial-lending portfolios, according to Siefers.
'Pricing Gets Whacked'
"You think of the amount of capital that's in the industry and how many banks there are starving to generate loans, it's inevitable that pricing gets whacked and terms and conditions start to get hit as well," Siefers said. "While growth might be there on the C&I side, it's less clear that the profitability is there."
Hall said that Regions faces "incremental pricing competition," particularly in middle-market lending.
Regions said this week that the company has 1,000 fewer employees than it did at the start of the year and Hall said he expects more headcount reductions by the end of 2011.
BB&T and SunTrust have announced cost-cutting plans. BB&T CEO Kelly King, 63, said he told business leaders at the Winston-Salem, North Carolina-based bank to "reconceptualize" their units. SunTrust CEO William H. Rogers said in July the bank is planning to cut $300 million in annual expenses by the end of 2013.
"The pressure cooker that they've lived in, and the change in their perception of what they have to accomplish, they all know they're not going to get much on the revenue side, so they have to generate these savings on the expense side," said Marty Mosby, an analyst at Guggenheim Securities LLC in Memphis, Tennessee.
Bloomberg News
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