Finance News

With no giant buying and selling arms on Wall Avenue, regional banks depend on mortgages and charges to beat earnings

A man walks past the Wall Street Charging Bull on March 24, 2020 in New York, United States.

Wang Ying | Xinhua News Agency Getty Images

Several banks reported surprisingly strong second-quarter results in the opening week of the earnings season, but smaller national and regional banks had to rely on other business areas than their well-known competitors.

Major banks, including Citigroup, JPMorgan, and Morgan Stanley, used massive trading volumes to exceed profit expectations despite the ongoing struggles of the US economy during the coronavirus pandemic. These trading units tend to perform best when the markets are volatile, helping to protect the big banks from economic struggles.

Some of the medium-sized banks also had counter-cyclical help as lower interest rates boosted mortgage refinancing even though they weighed on net interest margins. The success of the mortgage businesses contributed to stronger than expected results for US Bancorp and the smaller Citizens Financial Group.

Bruce Van Saun, CEO of Citizens, said the combination of low mortgage rates, high margins, and people who want to move in the summer triggered a "perfect storm" for the mortgage business. He expected the second quarter to be the peak of the mortgage business in this cycle, but that it should remain an area of ​​strength.

"We thought the second quarter was so strong that if we remove some of the seasonal factors in the second half of the year, it will be hard to repeat, but we still think it will be pretty darn good." "Said Van Saun.

For US Bancorp, RBC Capital Markets and Morgan Stanley raised their earnings estimates for the bank after the earnings report, citing revenue growth from fees.

"While USB reports results among industry-leading profitability levels, we believe the company's strong underwriting standards and world-class management team will guide the day through these difficult times," RBC said in a note.

The easiest way to gauge the impact of the pandemic downturn on banks is through risk provisioning. This measure has increased in the past two quarters as banks prepare to see credit deteriorate during the economic downturn. PNC Financial had a provision of $ 2.5 billion for the quarter, which resulted in a negative operating result for the quarter.

One of the questions raised in the Citizens' Call for Profit and in a note from Piper Sandler was whether the bank's provision for credit losses of $ 464 million was large enough.

Van Saun, who described his view of the economic recovery as an improvement to a "sawtooth pattern" that included seizures and starts based on the health situation, said he was confident that the provisions would be sufficient for his bank's business mix, which is much less dependent involves on credit cards than some of the bigger players.

"It is very difficult to read all banks with different portfolios and different compositions of their credit assets and simply to say" Hey, this number is bigger than this number ", so they are more careful and these other people are I have to catch up" said Van Saun. "That is not the case. You really have to look at the detailed details."

The bank's stock opened higher after earnings were announced, but trended down and became negative in the afternoon trade. Citizens' shares have fallen by around 38% since the beginning of the year, reflecting the decline in the SPDR KBW Regional Banking ETF.

Some other regional banks, similar in size to Citizens, are expected to post earnings next week, including Comerica on Tuesday and Fifth Third on Thursday.

– Michael Bloom from CNBC contributed to this story.

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