NEW YORK (
) -- Loan growth was the one bright spot in the third quarter earnings season for banks, amid shrinking margins, higher expenses and challenging fee income and trading environments.
For the greater part of the recovery, investors have been disappointed by the lack of revenue growth at banks as loan demand withered and underwriting standards tightened.
In recent quarters, however, banks have been able to manage some loan growth, especially in the commercial and lending segment.
The average loan balances at the 21 largest banks increased 1% over the previous quarter, according to KBW, with 80% seeing quarter on quarter growth. Commercial and industrial lending has led the way, with bankers still talking about increasing price competition as lenders battle for market share.
Loan growth still remains elusive for
Bank of America
, which saw overall loans fall 1%. The bank also lost its position as the biggest bank by assets in the third quarter to
Still, investors appear wary of increased lending amid a significantly weaker economic outlook. Banks have come a long way in improving credit quality and investors fear that they might be loosening their lending standards just at a time when the economy looks set to slip into a recession again.
More bullish analysts argue that banks that are able to manage loan growth when business confidence is admittedly weak are poised to benefit the most in a recovery.
Banks are also eager to show that they are lending to small and medium businesses amid criticism from Occupy Wall Street protesters that bankers are not doing enough to boost the economy and create jobs.
came up with a list of ten banks that have seen strong double-digit growth on a year-on-year basis in commercial, agricultural and financial loans.
The shortlist was arrived at by screening for banks with a total assets of more than $5 billion, for which third quarter commercial lending data was available from SNL Financial.
even as the economy is flailing.
10. Wells Fargo
are down about 18% year to date, outperforming other big money center banks including Bank of America, Citigroup and JPMorgan Chase.
The fourth largest bank by assets reported a third quarter net income of $4.1 billion or 72 cents per share, compared to $3.34 billion or 60 cents per share in the quarter ending September 2010.
Revenue was $19.6 billion, compared with $20.4 billion in second quarter 2011, and $20.87 billion in the same period in 2010.
Third-quarter results missed analysts estimates on revenue, as the bank could not escape volatility in the capital markets segment.
Still, it reported solid loan growth. Commercial, financial and agricultural loans grew 5% quarter-on-quarter and 12% year-on-year. Total commercial loans in its core portfolio increased 3.1% to $333.51 million from $323.67 million in the second quarter of 2011. Total loans, including consumer loans, in its core portfolio rose 2% to $643.59 million from $630.16 million from the prior quarter.
Third quarter net charge-offs were $2.6 billion, or 1.37% (annualized) of average loans, down from the second quarter net charge-off rate of $2.8 billion or 1.52%. Provision for credit losses declined 47% year on year to $1.81 billion, resulting in a reserve release of $800 million.
The stock trades at eight times its 2012 consensus earnings per share estimate, according to Factset.
The analyst community is overwhelmingly bullish on the stock, with 26 out of 34 analysts rating it a buy or outperform and seven maintaining a hold rating on the stock. Only one analyst has a sell call on the stock.
While many analysts cut estimates following its third quarter results, they retained a positive outlook on the stock. "With its well-diversified business model and shareholder-driven management team that has a demonstrated ability to execute, we continue to believe Wells will survive this credit cycle better than most and is better positioned to grow revenues," RBC Capital said in a report.
9. U.S. Bancorp
have outperformed its peers, declining only 7% year-to-date.
The bank saw strong lending trends in the third quarter, driving a net income growth of 40% year-over-year to $1.273 billion or 64 cents per share from $908 million or 45 cents per share in the third quarter of September 2010. Net revenues rose 4.5% on a year-on-year basis and 2.2% quarter on quarter.
U.S. Bancorp saw average total loans increase 5% over the corresponding quarter of the previous year- 4.5% excluding acquisitions. Average total commercial loans jumped nearly 12%, with the quarterly average commercial and commercial real estate commitments growing 16.8% year-on-year.
"For all the talk earlier this year about when will loan growth come back, we are surprised that more isn't being made about the solid growth at USB," Oppenheimer analyst Chris Kotowski wrote in a report following the results. "Not only was the growth significant (7% annualized including the covered assets and 9.5% annualized excluding the covered assets), it's coming across almost their entire portfolio."
The bank is also simultaneously benefiting from improving credit quality, with the net charge-offs declining 10% in the third quarter over the previous quarter. Provision for loan losses fell 48% to $519 million.
The company released reserves totaling $150 million, slightly lower than the previous quarter, as credit trends stabilized.
The stock trades at 10 times its consensus 2012 earnings per share.
Out of 35 analysts covering the stock, 20 rate it a buy or outperform, while 13 have a hold rating on the stock. Only two analysts rate the stock a sell or underperform.
8. Huntington Bancshares
have dropped 25% year-to-date.
The Columbus, Ohio-based bank reported a third quarter net income to common shareholders of $143.4 million or 16 cents per share, up from $100.9 million or 10 cents per share in the year-ago quarter, but down 2% from $145.9 million or 16 cents per share in the previous quarter.
The bank saw average loans increase at an annualized rate of 8% during the quarter. Commercial, agricultural and financial loans surged 3% quarter on quarter or 12% year on year to $13.93 billion according to SNL Financial data.
Growth in the average balances of the automobile portfolio and commercial and industrial loan portfolio was strong, up 17% and 9% annualized, respectively. Residential mortgages also experienced growth of 5% (19% annualized).
Provision for loan losses increased 22% from the prior quarter, reflecting both strong loan growth and expectation of a weaker recovery. The period- end allowance for credit losses as a percentage of total loans and leases decreased to 2.71% from 2.84%.
The bank has a Tier 1 Risk-Based Capital ratio of 10.17%. The stock trades at a price-earnings multiple of 8.5 times its consensus 2012 earnings per share estimates and has a dividend yield of 3.1%.
Out of 24 analysts covering the stock, 12 rate it a buy or outperform, 10 have a hold call and two analysts have an underperform rating on the stock.
7. Associated Banc-Corp
Shares of Green Bay, Wisconsin -based
have declined 25% year to date.
The regional bank reported a third quarter income to common shareholders of $34.0 million, or 20 cents per common share for the quarter ended September 30, 2011, higher than the $25.6 million, or 15 cents per common share in the previous quarter and nearly five times the $6.9 million, or 4 cents per share reported in the corresponding year-ago quarter.
Commercial, agricultural and financial loans increased 5% quarter on quarter and 12% year-on-year to $3.36 billion.
The bank said total loans were up 3% to $13.5 billion from the prior quarter, with commercial and business lending (C&I, leasing, and owner-occupied CRE loans) growing by $198 million, commercial real estate lending expanding $108 million and retail loans and residential mortgages rising by another $108 million.
The bank set aside significantly less for bad loans in the third quarter. Provision for loan losses came in at $4 million, only a fraction of the $64 million provided in the year-ago quarter. The loan loss reserve stood at $400 million on September 30, representing an allowance equal to 2.96% of loans.
Despite the vast improvement in credit quality, Sandler O' Neill analysts said the bank will continue to face challenges on the revenue front while expenses have been marching higher. "We could not be happier about how either the credit or capital stories is playing out. But until the revenue/expense relationship show signs of a more favorable turn, which could still be some time off, we have trouble seeing the stock sustaining much upward traction."
The stock trades at 13 times its consensus 2012 forward earnings per share estimate.
Only four out of the 15 analysts covering the stock rate it a buy or outperform. 10 analysts have a hold rating and one analyst has an underperform rating on the stock.
6. Webster Financial
Shares of Connecticut-based
have proved especially resilient among bank stocks in 2011 and is actually up 15% over a one-year period.
The bank reported a net income of $41.5 million, or 45 cents per diluted share for the quarter ended September 30, 2011, compared to $33.4 million, or 36 cents per diluted share, for second quarter and $17.77 million or 22 cents per share in the year-ago period.
Commercial, agricultural and financial loans rose 13% year-on-year and 2% sequentially to $2.33 billion. In the quarter, commercial non-mortgage, asset based lending and commercial real estate loans increased by $24.8 million, $29.5 million and $53.0 million, respectively, while equipment finance loans declined by $59.7 million.
Residential mortgage loans increased by $10.9 million, while consumer loans declined by $20.6 million.
Provision for loan losses fell sharply to $5 million from $25 million in the year-ago quarter.
The stock trades at 12 times its consensus 2012 earnings per share estimate and 1.4 times tangible book value.
Out of the 16 analysts covering the stock, nine rate it a buy or outperform, while seven analysts have a hold rating on the stock.
5. PNC Financial Services
PNC Financial Services
are down 12% year-to-date.
The Pittsburgh, Pennsylvania-based bank reported a third quarter net income of $834 million or $1.55 per share compared to a $912 million or $1.67 per share in the previous quarter and $1.1 billion or $2.07 per share a year earlier.
The third quarter 2010 results included an after-tax gain of $328 million, or 62 cents per diluted common share, for the sale of PNC Global Investment Servicing.
Total loans grew $4.2 billion to $155 billion, with commercial lending increasing by $3.7 billion or 6% quarter-on-quarter. Commercial agricultural and financial loans jumped 15% year-on-year. Commercial real estate loans grew 1%, the first positive quarter since 2008.
PNC has been active on the acquisition front , buying Royal Bank of Canada's US retail banking operations in June. The deal is expected to close in March 2012. That should further boost loan growth.
Net charge-offs declined to $365 million in the third quarter compared with $414 million in the second quarter. Provision for loan losses declined 7% to $261 million. The allowance for loan and lease losses was 122 percent of nonperforming loans.
The stock trades at 9 times 2012 consensus estimates.
24 analysts rate the stock a buy and 9 analysts rate it a hold. There are no sell ratings on the stock.
4. City National Corporation
Shares of Los Angeles, California-based
City National Corporation
have shed 35% in 2011.
The bank reported a third-quarter net income of $41.4 million or 77 cents per share, up 20% from $34.4 million or 65 cents per share in the third quarter of 2010.
Average third-quarter loan balances were $11.8 billion, up 2 percent from the second quarter of 2011 and 3 percent from the year-ago quarter, excluding loans covered by acquisition-related loss-sharing agreements with the FDIC. Commercial loan balances jumped 6% quarter on quarter and 15% year on-year.
The bank set aside $8 million in the third quarter for credit losses on loans excluding covered loans, after making no provision in the earlier two quarters. The company says it remains "adequately reserved" at 2.16% of total non-covered loans.
Sandler O'Neill maintained its buy rating following the results, noting that the bank's commercial and industrial sequential loan growth of 8% was mostly "organic" as opposed to acquisition-driven and stemmed from new customers.
The stock trades at 11 times its 2012 earnings per share consensus estimate.
Of the 27 analysts covering the stock, 9 have a buy or outperform rating, 17 a hold rating and one has an underperform rating on the stock.
3. Texas Capital Bancshares
Texas Capital Bancshares
are up 26% year to date and 45% over the past one year, making it one of the rare outperformers in the banking sector.
The bank said third quarter profit rose 30% sequentially and 128% year-on-year to $21.71 million. Earnings per share came in at 56 cents, up 124% from 25 cents in the third quarter of 2010.
Total commercial, agricultural and financial loans grew 4% quarter -on -quarter and 28% year-on-year.
Credit quality improved at the bank during the third quarter with net charge-offs at $6.3 million, almost half of what was reported in the year-ago quarter. The bank reduced its provision for loan losses to $8.7 million from $13.5 million in the third quarter of 2010.
Texas Capital Bancshares has also been cited as an
acquisition candidate by analysts because of its strong franchise in Texas.
The stock trades at about 12 times its 2012 earnings estimate.
Eight analysts rate the stock a buy or outperform, while six analysts have a hold rating. One analyst has a sell rating on the stock.
2. First Niagara Financial
First Niagara Financial
are down 38% in 2011.
The Buffalo, New York-based regional bank reported a third quarter income of $56.98 million or 19 cents per share, missing the 26-cent estimate of the consensus.
First Niagara said that excluding non-operating items, its third-quarter net operating income was $73.6 million, or 25 cents a share, increasing from $71.2 million, or 25 cents a share, the previous quarter, and $46.9 million, or 23 cents a share, a year earlier.
Pre-provision net revenue rose 59% to $132.11 million versus $83 million in the year-ago-quarter. Total loans and leases averaged $16.2 billion in the third quarter of 2011, increasing by $311 million, or an annualized 8%, on a sequential basis.
Commercial loan balances in the third quarter soared 58% year-on-year to $3.58 billion and is up 8% on a quarter-on-quarter basis.
First Niagara's third-quarter provision for loan losses was $14.5 million, declining from $17.3 million in the second quarter, but rising from $11 million in the third quarter of 2010. The company also grew its loan loss reserves by $5.7 million to $112.7 million as of Sept. 30, bucking the earnings-padding reserve release trend for most regional banks.
The bank agreed in July to purchase 195 branches in Upstate New York and Connecticut from
for roughly $1 billion, in a deal that is expected to be completed in early 2012.
The company expects to raise between $750 million and $800 million in common equity before closing on the HSBC deal, which has depressed shares in recent months.
The stock trades at a dividend yield of more than 7% and a forward price-to-earnings ratio of 7.9.
Seven analysts rate the stock a buy or outperform and 4 analysts have a hold rating on the stock.
1. First Republic Bank
First Republic Bank
of San Francisco, CA are off by 5% in 2011.
The bank tops the list for generating the biggest growth in commercial loan category in the third quarter, although this comes off a small base.
Commercial loans grew 12% from the second quarter of 2011 and a whopping 63% on a year-on-year basis to $1.439 billion.
Loan origination volume rose to $2.6 billion, its second highest on record. The majority of the origination is driven not by commercial loans but by residential mortgages. Of the total residential mortgage loans, 37% were purchases rather than refinancing, according to research by Sandler O' Neill.
Net income was $87.8 million for the third quarter of 2011, up 32% compared with last year's third quarter. Earnings per share at 66 cents up 25% compared with last year's third quarter. Excluding one-time items, net income was $55.1 million or 42 cents per share for the third quarter.
Provision for loan losses increased to $15.5 million from $4.5 million in the year-ago quarter, to reflect a growing loan portfolio. Nonperforming assets as a percent of total assets is less than 1/8 of 1%, according to the bank's press release.
The stock trades at 10 times its consensus 2012 earnings per share and over 150% of tangible book per share, representing significant premiums relative to its regional/community bank peers.
"We think this valuation is well deserved given First Republic's superior growth rates, its exceptional credit quality, and its higher-multiple money management business," RBC Capital analyst Joe Morford said in a report. "However, given the significant contribution from purchase accounting benefits that will fade out over the next few years, First Republic will be challenged to show much growth in reported EPS even though the underlying core trends should be solid."
The analyst has a sector perform rating on the stock with a price target of $28 but advises buying on weakness as shares make for an attractive long-term holding.
The stock has a mean buy rating of 2.3, with 4 analysts rating it a buy or outperform and 6 analysts rate it a hold.
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--Written by Shanthi Bharatwaj in New York
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