Story updated to add three additonal banks.
NEW YORK (
) -- Heading into third-quarter earnings season, investors will be keying in on regional banks' continued release of loan loss reserves, while seeking any sign of revenue growth.
Federal Deposit Insurance Corp.
chairman Martin J. Gruenberg pointed out earlier this week that the combined industry's eight straight quarters of earnings improvements have been driven by "reductions in loan-loss provisions -- the money banks set aside against expected loan losses -- account for most of the improvement in industry earnings."
The declines in loan loss reserves have been justified, as many large banks have succeeded in working through large portions of their problem loans, but ""as the levels of loan-loss provisions approach their historic norms, the prospects of earnings improvement from further reductions diminish," the acting chairman said, concluding that "increased lending will be essential for future revenue growth."
From the dismal action for bank stocks this year and the consensus earnings estimates among analysts polled by FactSet, it would seem that investors will be waiting for several more quarters before seeing clear signs of revenue growth for the banking industry.
Best of the Bunch
Excluding the "big four" U.S. bank holding companies --
Bank of America
-- the regional banks with total assets exceeding $25 billion with the strongest second-quarter returns on average assets (ROA) were
Capital One Financial
, with an ROA of 1.90%, followed by
, at 1.51%, and
PNC Financial Services
, at 1.40%.
The following are quick reviews of second-quarter earnings for the top seven performers among regional banks (excluding trust banks) with total assets exceeding $25 billion, along with a review of three that have recently turned the corner to profitability, or are still looking to get back into the black:
For Capital One, the big focus is completing its pending $9 deal to acquire ING Direct from
, after which it has agreed to acquire HSBC's
U.S. credit card portfolio for a premium of $2.6 billion.
Capital One pressed its case for regulatory approval of the ING Direct deal on Tuesday, at
on the merger being held by the Federal Reserve.
Capital One reported second-quarter net income of $911 million, or $1.97 a share, compared to $1 billion, or $2.21 a share, in the first quarter and $608 million, or $1.33 a share, during the second quarter of 2010. The second-quarter results were boosted by a $579 million release of loan loss reserves.
The earnings decline from the previous quarter reflected "contra-revenue of $52 million," as the Capital One anticipated refunding credit card payment protection fees to customers in the United Kingdom. Second-quarter earnings were also lowered by a $22 million adjustment to Capital One's liability for rewards programs.
For the third quarter, the consensus among analysts polled by FactSet is for Capital One to post earnings of $1.68 a share.
Capital One's shares have declined 4% year-to-date, through Thursday's close at $40.80. The shares trade for seven times the consensus 2012 earnings estimate of $6.05 a share.
Oppenheimer analyst Chris Kotowski on Sept. 6 upgraded the shares to "Outperform," saying the "sell-off in U.S.-centric, plain-vanilla and relatively transparent banks is not warranted and that asset quality will be much better than what is being discounted by the stocks," and that Capital One's sell-off was "particularly hard to understand as the company announced two acquisitions this summer which together should be substantially accretive to both earnings and tangible book value."
M&T acquired Wilmington Trust on May 16 and reported second-quarter net income to common shareholders of $297.2 million, or $2.42 a share, increasing from $173.6 million, or $1.46 a share, in the second quarter of 2010. The second-quarter numbers only reflected Wilmington Trust's contribution since the acquisition date.
M&T's earnings improvement reflected $110.7 million in securities gains during the second quarter, increasing from $39.4 million a year earlier.
During the second quarter, M&T fully repaid $330 million in federal bailout funds that Wilmington Trust had received through the Troubled Assets Relief Program, or TARP. M&T also repaid $370 million of the $600 million in TARP money it had received, leaving the company owing $230 million in TARP money, along with an additional $151.5 million in TARP money the government originally provided to Provident Bancshares, which M&T acquired in May 2009.
M&T has estimated that beginning in the fourth quarter, its earnings will be reduced by roughly $15 to $20 million, or an estimated 10 cents a quarter, from the Federal Reserve's limitations on debit card interchange fees that go into effect on October 1.
The consensus among analysts polled by FactSet is for the company to earn $1.63 a share for the third quarter.
The shares have declined 20% year-to-date, closing at $67.90 Thursday and trading for nine times the consensus 2012 EPS estimate of $7.32. Based on a quarterly payout of 70 cents, the shares have a dividend yield of 4.12%.
In a Sept. 14 report on the state of the banking sector, Guggenheim Securities analyst Marty Mosby included M&T among a group of regional banks "with catalysts for continued earnings momentum."
U.S. Bancorp reported second-quarter net income of $1.2 billion, or 60 cents a share, increasing from $1 billion, or 52 cents a share, in the first quarter and $766 million, or 45 cents a share, in the second quarter of 2010. The second-quarter results were boosted by a $175 million release of loan loss reserves.
The company reported strong second-quarter loan growth, as second-quarter commercial and commercial real estate loan originations and commitments totaled $16.1 billion, which was a 41% year-over-year increase.
The consensus estimate is for USB to earn 61 cents a share for the third quarter.
The shares closed at $22.91 Thursday, declining 14% year-to-date, and trading for nine times the consensus 2012 EPS estimate of $2.61.
Mosby also included USB in his list of regional bank picks for investors, in a volatile market.
PNC Financial Services
PNC reported second-quarter net income attributable to common shareholders of $888 million, or $1.67 a share, compared to $833 million, or $1.57 a share, during the first quarter, and $786 million, or $1.43 a share, during the second quarter of 2010.
The second-quarter results reflected a $132 million release of loan loss reserves.
The company's total loans increased by 1% during the second quarter to $150 billion, with commercial loan balances increasing by $2 billion "from new client acquisition" when PNC bought 19 branches in the Tampa, Fla., area, from
With a pending deal to acquire RBC Bank (USA) from
Royal Bank of Canada
(RY), PNC will add $25 billion in assets and 424 branches in the Southeast.
The consensus is for PNC to earn $1.50 a share for the third quarter.
Marty Mosby also included PNC among his list of preferred bank picks for investors.
The shares closed at $46.74 Thursday, for a year-to-date decline of 22%, and were trading for eight times the consensus 2012 EPS estimate of $6.19.
Fifth Third Bancorp
reported second- net income available to common shareholders of $328 million, or 35 cents a share, increasing from to $88 million, or 10 cents a share in the first quarter and $130 million, or 16 cents a share, in the second quarter of 2010.
The company's credit costs continued to decline, with a $113 million provision for loan and lease losses during the second quarter, compared to $168 million the previous quarter and $325 million during the second quarter of 2010.
The second-quarter ROA was 1.21%, according to SNL Financial.
The consensus among analysts polled by FactSet is for the Cincinnati lender to earn 33 cents a share during the third quarter.
Todd Hagerman of Sterne Agee in a Sept. 12 report included Fifth Third among a recommended "basket of over-capitalized regionals operating in reasonable growth markets."
Fifth Third's shares closed at $9.60 Thursday, down 34% year-to-date. Based on a quarterly payout of eight cents, the shares have a dividend yield of 3.33%.
The shares trade for seven times the consensus 2012 EPS estimate of $1.39.
New York Community Bancorp
New York Community Bancorp
( NYB) reported second-quarter net income of $119.5 million, or 27 cents a share, declining from $123.2 million, or 28 cents a share in the first quarter and $131.4 million, or 30 cents a share, in the second quarter of 2010.
The earnings decline mainly reflected a continued reduction in mortgage Banking income, to $11.8 million in the second quarter, from $19.9 million in the first quarter and $67 million in the second quarter of 2010.
The Westbury, N.Y. lender's second-quarter ROA was 1.17%, according to SNL Financial.
The consensus among analysts polled by FactSet is for New York Community Bancorp to earn $27 cents a share during the third quarter.
New York Community's shares closed at $11.55 Thursday, declining 36% year-to-date. Based on a quarterly dividend payout of 25 cents -- which the company has maintained for 30 consecutive quarters -- the shares have a dividend yield of 8.66%.
The shares trade for 10 times the consensus 2012 EPS estimate of $1.19, showing confidence among analyst and investors that the company will continue to maintain sufficient earnings to support the dividend.
The company was recently included among
of Cleveland reported KeyCorp reported second-quarter net income attributable to common shareholders of $234 million, or 25 cents a share, increasing from $29 million, or three cents a share, in the second quarter of 2010. During the second quarter, the company transferred $8 million from loan loss reserves. A year earlier, KeyCorp recorded a provision for loan losses of $228 million.
A $142 million decline in loan loss reserves during the second quarter directly boosted KeyCorp's earnings performance.
The company's second-quarter ROA was 1.15% according to SNL Financial.
The consensus among analysts polled by FactSet is for KeyCorp to earn 21 cents a share in the third quarter.
The shares trade for eight times the consensus 2012 EPS estimate of 77 cents.
Keycorp was also included among
Turning the corner?
The following three regional players are either still looking to return to profitability, or have lagged peers by returning to the black over the past three quarters:
of Columbus, Ga., was the only large regional bank with total assets of more than $25 billion to post a lost during the second quarter, with a net loss to common shareholders of $53.3 million, or seven cents a share, despite a $47 million release of loan loss reserves during the quarter. That loss included $14.5 million in dividends and discount accretion on $967.9 million in preferred shares held by the federal government, for bailout funds provided to Synovus in December 2008, through the Troubled Assets Relief Program, or TARP.
During the second quarter, the company's bottom line took an even harder hit from $39.9 million in expenses on foreclosed property, although this was down from $46.4 million a year earlier. The company's ratio of nonperforming assets to total assets was 5.85% as of June 30, improving from 5.97% the previous quarter and 6.66% a year earlier.
The consensus among analysts polled by FactSet is for Synovus to post a net loss to common shareholders of three cents in the third quarter, followed by a penny loss in the fourth quarter. For Synovus, the focus remains working through its nonperformers, and with interest income declining from a prolonged low-rate environment and weak loan demand, it's a long slog for investors.
Sterne Agee analyst Todd Hagerman has a neutral rating on Synovus, saying in a Sept. 12 report that "the recent downdraft in share price and market speculation surrounding a potential distressed purchase of SNV."
Shares of Synovus closed at $1.18 Thursday, declining 55% year-to-date. The shares trade for just under half their tangible book value, according to SNL.
After posting a first-quarter net loss of $555.6 million, or $1.13 a share, after being forced by the Office of Thrift Supervision to restructure its balance sheet, after a long-term leverage strategy of borrowing from the Federal Home Loan Bank of New York and investing the proceeds in securities backfired in a prolonged low-rate environment,
Hudson City Bancorp
of Paramus, N.J., lowered its quarterly dividend to 8 cents a share, from 15 cents a share.
The thrift holding company returned to profitability in the second quarter, with earnings of $96 million, or 19 cents a share, declining from $142.6 million, or 29 cents a share, during the second quarter of 2010. Total assets were $51.8 million as of June 30, declining 15% from a year earlier, reflecting the first-quarter deleveraging. The deleveraging also led to an increase in Hudson City's net interest margin -- the difference between the average rate earned on loans and investments and the average cost of loans and deposits -- to 2.14% from 1.72% in the first quarter and 2.13% in the second quarter of 2010.
Considering the narrow margin, Hudson City's second-quarter ROA was a decent 0.74% according to SNL, declining from 0.93% a year earlier. This reflects the company's industry-leading efficiency. The company's second-quarter efficiency ratio -- essentially the number of pennies of expenses for each dollar of revenue -- was a tax-adjusted 30.26 according to SNL, which was by far the lowest and best among the large regional holding companies.
The consensus among analysts is for Hudson City to repeat its second-quarter performance, earning 19 cents a share during the third quarter, which would be a sharp decline from the second quarter. With the shares declining 56% year-to-date through Wednesday's market close at $5.46, Hudson City has a dividend yield of 5.86%, but the reduced dividend could be threatened if the company goes through a second round of restructuring.
Matthew Kelley of Sterne Agee is neutral on the shares, saying in a recent report that "Without a restructuring, in a sustained low rate environment we see the balance sheet shrinking and margins compressing for an extended period." Kelly added that a second restructuring of Hudson City's long-term borrowings "combined with a capital raise could put the company in a much better position to grow and take advantage of wider spreads and a more robust private mortgage market in the future."
Hudson City's shares closed at $5.51 Thursday, down 55% year-to-date. The shares have a dividend yield of 5.81% and trade for seven times the consensus 2012 EPS estimate of 77 cents.
of Birmingham, Ala., has the highest amount of TARP preferred shares outstanding, owing the government $3.5 billion in bailout funds. After eight consecutive quarterly losses to common shareholders, the company returned to profitability during the fourth quarter, with earnings of three cents a share, followed by a penny in the first quarter and earnings of four cents a share in the second quarter.
The consensus among analysts polled by FactSet is for Regions to report third-quarter earnings of four cents a share.
After the company announced its second-quarter results, FIG Partners analyst Christopher Marinac said he expected Regions to complete its sale of Morgan Keegan during the first quarter of 2012, "for $700 million followed by $1.3 Billion of common shares issued" to help the company repay TARP. So investors are looking at a work in progress, with significant dilution ahead for the shares.
The shares closed at $3.42 Thursday, down 51% year-to-date, and were trading for 6.5 times the consensus 2012 EPS estimate of 56 cents.
Deutsche Bank analyst Matt O'Connor on Thursday reiterated his "Buy" rating for Regions, with a $5 price target, because the shares were trading for just 0.6 times tangible book value and because he expects "improving creditto be a positive for the stock" over coming quarters. While O'Connor also said the company is unlikely to repay TARP in the near term, despite "concern in the market that Treasury will pressure RF (and others) to repay TARP (for political reasons)," since a quick repayment and "a forced raise
of common equity could pressure the Board to consider a sale of the company."
The analyst added that although "a sale would likely be positive for shareholders, it may reduce credit availability and jobs in RF's markets (both also political concerns)."
Written by Philip van Doorn in Jupiter, Fla.
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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.