Without Wall Street’s Great Commercial Weapons, Regional Banks Rely On Mortgages And Fees To Beat Profits

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

Wang Ying | Xinhua News Agency | Getty Images

Several banks reported surprisingly strong second quarter results during the opening week of the earnings season, but smaller national and regional banks had to rely on different lines of business than their larger ones. competitors.

Major banks, including Citigroup, JP Morgan and Morgan Stanley used massive commercial income to beat profit expectations despite the continued struggles of the US economy during the coronavirus pandemic. These trading units tend to perform better when the markets are volatile, which helps protect large banks from economic hardship.

Some of the mid-sized banks have also benefited from countercyclical assistance, as interest rates relaunching mortgage refinancing even if they hurt net interest margins. The success of the mortgage businesses contributed to stronger than expected results for US Bancorp and the smallest Citizens Financial Group.

Citizens CEO Bruce Van Saun said the combination of low mortgage rates, high margins and people looking to relocate during the summer has created a “perfect storm” for the mortgage industry. He said he expected the second quarter to represent the peak of mortgage activity this cycle, but that it should remain an area of ​​strength.

“We felt the second quarter was so strong, such a gangbuster quarter, that it is unlikely to be repeated as we remove some of the seasonal factors in the second half of the year, but we still believe that it’s gonna be damn good, ”said Van Saun.

For US Bancorp, RBC Capital Markets and Morgan Stanley, citing growth in fee income, increased their earnings estimates for the bank in the wake of the earnings report.

“While USB is reporting results below its industry-leading profitability levels, we believe the company’s rigorous underwriting standards and its top-notch management team will get through this tough time,” RBC said in a note.

The impact of the pandemic crisis on banks is more easily seen in the allowance for credit losses. This measure has jumped over the past two quarters as banks brace for deterioration in lending during the economic downturn. PNC Financial recorded a provision of $ 2.5 billion for the quarter, resulting in negative operating income for the quarter.

One of the questions raised on the Citizens Income Appeal and in a note from Piper Sandler was whether the bank’s allowance for credit losses of $ 464 million was large enough.

Van Saun, who described his view of the economic recovery as an improvement in a “roller coaster pattern” that included crises and departures depending on the health situation, said he was confident that supplies were sufficient for the mix of activities of his bank, which includes a much lower dependency. on credit cards than some of the bigger players.

“It’s very hard to do a read of all the banks with different portfolios, different compositions of where their loan assets are, and just say, ‘Hey, that number is greater than that number,’ they’re so be more careful, and these other people are gonna have to catch up, ”Van Saun said.“ That’s not the case. You really have to look at the granular level of detail. “

The bank’s stock opened higher after its earnings announcement, but trended lower, then turned negative in afternoon trading. The stock of citizens is down around 38% since the start of the year, reflecting the decline in ETF SPDR KBW Regional Bank.

Some other regional banks similar in size to citizens are expected to report their income next week, including Comerica Tuesday and Fifth third Thursday.

—Michael Bloom of CNBC contributed to this story.


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