By Jed Horowitz
NEW YORK (Reuters) - A trio of large regional banks weighed in with earnings on Thursday that showed stronger credit quality and capital strength but few signs that their core businesses are improving due to low investment returns and weak loan demand.
The banks are trying to offset declining income from low interest rates on loans and investments by cutting deposit rates and raising fees in order to widen profit margins.
In conference calls with analysts to discuss their first-quarter results, bank executives said community banks and aggressive larger banks are competing for creditworthy borrowers while the ability to replace high-interest certificates of deposit with cheaper rates is waning as CDs purchased before the financial crisis mature.
That leaves banks with an excess of deposits that they can't put to good use by making loans.
"Deposit funding, the value of that funding is lower today than probably it has been in our careers ," said Bruce Lee, chief credit officer of Fifth Third Bancorp, a Cincinnati, Ohio-based company that is the 23rd biggest U.S. bank by assets.
Several banks reported stronger-than-expected net income from new mortgage loans and sales of mortgages, but analysts and bankers said the pace is not sustainable because the supply of high-interest mortgages loans is dwindling.
Net interest margin — a metric measuring the difference between what banks pays for funding and receive from lending and investing — will likely decline in the rest of the year, several bankers said.
New regulations limiting fees charged to merchants for processing card transactions is costing Fifth Third about $30 million a quarter. Like many other banks, it has been raising overdraft and other fees and continues to examine ways to make up for the lost revenue, executives said on their call with analysts.
The slow rate of the economic recovery in the U.S. also concerns many bankers.
"We're not seeing our customers and clients growing employment," KeyCorp Chief Financial Officer Jeff Weeden said on a conference call to discuss its quarterly report. "That is one area I would say continues to lag."
Cleveland-based KeyCorp is the 26th biggest bank by assets. There are more than 8,000 banks in the United States.
Kelly King, the chairman and chief executive of BB&T Corp, the 19th biggest bank by assets that has grown quickly by buying small banks and insurance companies, warned that the small- to medium-sized business owners he speaks with are not investing because of uncertainty about regulatory and economic policies.
"What they'll say to me is, ‘Look, my business is kind of okay but it's mostly because I'm really controlling my costs, but I am so scared about what's coming out of Washington'," he said on a call after his Winston-Salem, N.C.-based company said net income rose in its first quarter on lower loan loss reserves.
Clients do not know what is going to happen with insurance costs or taxes and complain that regulations are killing them, King said.
He forecast economic growth of 2 percent to 2.5 percent for the rest of the year.
Portfolio managers who focus on bank stocks said until there is demand for banks' principal product - money - bank shares will generally remain undervalued.
"We'll know in the next 18 to 30 months whether things will work out for the banks," said David Ellison, president of the FBR mutual fund family and portfolio manager of its small-cap and large-cap financial funds. "Bank stocks will stay cheap for a long time and be a value trap if the economy takes a long time to grow."
Here is a summary of Thursday's regional bank reports:
The North Carolina-based company reported net income of $431 million, or 61 cents per share, compared with $225 million, or 32 cents per share, a year ago. The consensus estimate of analysts surveyed by Thomson Reuters I/B/E/S was 59 cents a share.
The bank's provision for credit losses fell 16 percent from a year ago.
Shares of BB&T closed down 0.6 percent on Thursday. The KBW Bank Index closed 0.8 percent lower.
FIFTH THIRD BANCORP
Ohio-based Fifth Third Bancorp reported net income available to common shareholders of $421 million, or 45 cents a share, up from $88 million, or 10 cents a share, a year before. Analysts, on average, had expected earnings of 37 cents per share, according to Thomson Reuters I/B/E/S.
Its first-quarter results were boosted by a $115 million pretax gain on the initial public offering of Vantiv Inc, a credit card payment processor in which it holds a 49 percent stake. It had earlier forecast a pretax gain of about $95 million related to Vantiv.
The company took a bigger reserve for future loan losses than in the last quarter of 2011 even as its nonperforming assets fell. Shares of Fifth Third ended 3.1 percent lower.
Cleveland-based KeyCorp reported first-quarter net income of $194 million, or 20 cents, a share, up 12 percent from the year-earlier quarter. It took a provision for loan losses of $42 million, up from $22 million in the fourth quarter of 2011, despite a 42 percent decline in nonperforming assets from the previous year.
Mike Turner, an analyst at Compass Point Research & Trading, wrote in a client note that the bank's expenses fell more than expected while its fee income was better than expected. He thinks the company will continue trading at a discount to tangible book value because of a single-digit return on equity.
Shares of KeyCorp closed 1 percent lower.
(This story corrected consensus mean analyst estimate for BB&T to 59 cents a share, and for Fifth Third to 37 cents a share)
(Reporting By Jed Horowitz; Editing by Tim Dobbyn)