Earnings season continued for the third quarter of 2024 as The Financial Brand pored over responses from officials from seven regional institutions — including one catapulted into the top 20 U.S. banks after last year’s industry debacle — to bank securities analysts about the impact of changing Federal Reserve monetary policy and key credit challenges.
1. Looking Ahead to More Rate Cuts Plus Yield Curve Shifts
A central issue in all of the banks’ earning briefings was the Federal Reserve’s interest rate cuts, bankers’ expectations for more such cuts, and the shifting yield curve. The impact of falling rates on demand for new credit and the performance of existing loans were two facets of executives’ discussions with the analysts. The outlook offered by each institution varied in part based on the moves they made in past quarters in anticipation of Fed rate cuts.
At Huntington Bancshares, Zach Wasserman, CFO, said the bank’s working assumption was that the Fed would cut rates twice more in 2024 and make five cuts during 2025.
Wasserman said that over the course of the current interest rate cycle Huntington aimed to be “asset sensitive” — taking steps so that the bank’s portfolio will be favored by rising rates, rather than being “liability sensitive” (benefiting from falling rates). More recently, he said, Huntington has been “reducing our level of asset sensitivity as market expectations are increasingly weighted toward a down rate path.”
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“That strategy has worked well to maximize the benefit from the rate cycle and to protect capital, while managing net interest margin within a tight corridor,” Wasserman added.
Fed rate cuts don’t happen in a vacuum, of course. The current economy will be part of a feedback loop. Wasserman pointed out that if there were fewer rate cuts, the bank’s performance might even be better for a time.
• Two views on a “rosy scenario.” At M&T Bank Corp., “we’re relatively neutral from an interest rate risk perspective. It is hard to be exact, but we are as neutral as you can be with the balance sheet and the complexities that we have,” said Daryl Bible, senior executive vice president and CFO. Bible said that for 2024 the bank anticipated an additional 50 basis points in rate cuts. That would make it a full percentage point cut for the year.
Gerard Cassidy, analyst with RBC Capital Markets, noted that it looked like the bank’s net interest income had bottomed out in the third quarter and would start to build back up if the market’s forward yield curve was correct and if the Fed cut the Fed funds rate to 3% to 3.5% by the end of 2025, and assuming that the yield curve becomes positively sloped. (A positively sloped yield curve means long-term rates are higher than short-term rates.) What did Bible think the outlook would be for the bank?
“You start off with a very rosy scenario,” Bible said. He said the bank has labored to be neutral on rates and was fortunate that the central bank’s cuts began when and as they did. An upward sloping yield curve would enhance interest income for the bank.
The next day, Cassidy asked officials at Fifth Third Bancorp a similar question and noted that another bank — he didn’t name M&T in his comment — had called his projected outlook “rosy.”
“If we can actually get a little bit more steepness in the curve, get the inversion out of the curve, that is very powerful for us from a net interest income perspective,” agreed Bryan Preston, Fifth Third CFO, “because we would see some relief on the liability side of the balance sheet.”
Tim Spence, Fifth Third chairman, CEO and president, added that “I don’t know that I see your outlook as being overly rosy… it’s probably a reflection of what both the Fed’s actions and the data would tell us is realistic. It probably feels rosy because we just haven’t seen an environment like that for a very long time.”
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2. Zions Isn’t Convinced that Inflation’s Retreat Will Be Smooth (Nor Continuous)
At Zions Bancorporation, the outlook for net interest income in the third quarter of 2025 calls for a slight-to-moderate increase, based on a remixing of earning assets, repricing of interest-bearing liabilities, and growth. In an exchange with Mike Mayo, analyst at Wells Fargo Securities, Zions officials suggested that institutions shouldn’t assume that Fed rate cuts are going to continue as sequentially as many seem to believe.
“I think it’s totally a fool’s errand to try and predict where the yield curve is headed next,” said Harris Simmons, chairman and CEO. “That’s bidding against a lot of smart money.”
Simmons believes that inflation hasn’t been quelled as thoroughly as many want to think.
“My personal leaning is toward the notion that inflation is probably going to be a little more stubborn than the Fed has believed,” said Simmons. “There are a lot of inflationary forces in the world. If I were betting my own money … I continue to believe that the real risk is more toward increasing rates than decreasing rates.”
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3. How Rate Cuts Could Affect Specialty Lending Lines
Some of regional banks are particularly strong in specialized lending activities, including Citizens Financial Group, Western Alliance Bank, and First Citizens Bancshares, specifically its Silicon Valley Bank division. (The company acquired the formerly independent Silicon Valley Bank in an FDIC deal after the events of banking industry issues of early 2023.)
• At Citizens Financial, John Woods, CFO, spoke of increasing optimism among the company’s commercial client base, precipitated by Fed easing and lower fears of a recession. At the same time, the current state of rates is helping certain product areas at Citizens. One is home equity lines of credit, especially among super prime borrowers. Citizens is a top player in HELOCs.
“The majority of the country is locked into 3%-ish mortgage rates,” said Brendan Coughlin, head of consumer banking. “So our HELOC business is incredibly well positioned.” (In late October the national average rate on 30-year fixed-rate mortgages was 6.57%, according to Bankrate.)
• A major business at Western Alliance Bancorporation is mortgage warehousing. In fact, Kenneth Vecchione, president and CEO, told analysts that in the wake of some departures from the business, Western Alliance is the largest bank in the space, besides the money center institutions. (Mortgage warehousing involves the temporary financing of home loans made by originating institutions that intend to sell the loans into the secondary mortgage market.)
Deutsche Bank’s Bernard Von Gizycki asked what kind of rate environment would boost volume for Western Alliance warehousing. CEO Vecchione said primary fixed-rate mortgage rates would have to get into the low 6s for momentum to start, and that 5.5%-5.75% would be ideal to start a fresh surge.
Dale Gibbons, CFO, elaborated, saying that a more tempered rate decline would work in the bank’s favor in mortgage warehousing, especially with refinancings. He said consumers would interpret a sudden drop as a signal that more drops are coming, and many might hang back. Their reasoning would be that with another drop in the offing, there is no sense doing a refinance of the refinance and paying the fees twice. By contrast, a gradual decline would persuade more people to refinance.
• At First Citizen’s Silicon Valley Bank, fund banking is a specialty. This consists of banking the credit needs of private equity firms and venture capital firms and the investors that place money with the firms’ funds and projects. For example, the firms may borrow to invest in various companies or activities, along with limited partners. When a “capital call” goes out for the limited partners to deliver the funds that they promised to put in, the partners often borrow from banks like the SVB division to fulfill that obligation immediately. The proceeds of those loans go to repaying the loans obtained by the PE and VC firms.
Bank officials hope that continuing rate cuts will increase fund banking lending opportunities for SVB. Craig Nix, CFO of the parent company, said management expects that SVB “will benefit from growth in the global fund banking business but do remain cautious on the absolute level of growth given the softness we experienced in the third quarter.” (Management indicated that loans fell during the quarter, as repayments pulled ahead of loan originations.)
Thus far interest has still been “muted,” according to Marc Cadieux, president of the SVB division, but activity may open up as rates fall. The time loans remain outstanding could lengthen with lower rates. Cadieux pointed out that when rates have been higher fund-related borrowers tend to repay more quickly.
Cadieux indicated another hopeful sign: The addition of new clients to the division’s customer roster and the return of more clients to the bank during the third quarter.
“We continue to feel good, directionally,” said Cadieux, “recognizing that our target markets are still experiencing a downturn. So that remains a headwind there, but we are encouraged by new client acquisition continuing to be positive.”
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4. Commercial Real Estate: Some Optimism, Some Pessimism as Strategies Vary
Reports on commercial real estate lending varied among the reporting institutions sampled by The Financial Brand. Viewpoints sometimes ran counter to those at other banks.
A cross section of what leaders were saying:
• At M&T Bank Corporation, a “diet” on CRE lending has been underway for a while, to reduce the company’s exposure to and concentration in CRE and promote more diversification in the loan portfolio. In the third quarter alone, year over year, the bank trimmed CRE by over $4 billion. At the recent historical high point, in 2019 CRE of all types came to 262% of the company’s Tier 1 capital plus the allowance for credit losses. At the end of the third quarter of 2024, this figure had fallen to 148%. CFO Daryl Bible thinks falling rates will enable borrowers to arrange more “takeouts” from M&T CRE loans. As lower rates lead to fresh CRE borrowing, the bank expects this sector to level off, by design, to 20% of overall lending.
• At Citizens Financial Group, Don McCree, head of commercial banking, noted that liquidity was returning to the CRE market — except in the office subsector. “It’s accelerating our ability to move down the overall exposures in the book,” said McCree.
Regarding office CRE, Bruce Van Saun, chairman and CEO, projected that working through issues in that area would remain with the bank at least through “a good chunk of 2025.” Van Saun pointed out that the bank had set heavy reserves in the office area — they are up to 12.1% over 11.1% in the second quarter — and had assigned good workout lenders.
“But the timing of when you recognize charge offs and when something might go to nonperforming assets moves around a bit, and is not always in our control,” said Van Saun. The bank believes the nonperforming office CRE has peaked and stabilized.
• At First Citizens CFO Craig Nix noted that most of the net charge offs in the third quarter were in the bank’s office CRE portfolio.
“We believe losses will remain elevated here due to high vacancy rates, continued pressure from interest rates, and limited liquidity in the market for refinancing maturing loans,” said Nix. He added that rate cuts could ease some of the pressures on office borrowers and, long term, help solve some issues in the portfolio.
• At Zions Bancorporation, Ryan Richards, CFO, noted that most CRE loans had estimated loan-to-value ratios of 70% or less. This level is conservative.
“Overall, we expect the CRE portfolio to perform reasonably well, with limited losses based on the current economic outlook, the types of problems being experienced by borrowers, relatively low loan-to-value ratios, and continued sponsor support,” said Richards.
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5. Regional Banks Make Strategic Shifts to Meet Challenges
In some presentations, leaders talked about changeups they’ve adopted recently.
• At Zions Bancorporation there was an increase in classified loans. In part that was the result of weaker performance trends cited among multifamily real estate loans. This was especially strong for multifamily construction loans made in 2021 and 2022 that have been hit harder than other credits by both higher rates and rent concessions during the lease-up period that were higher than anticipated.
However, another factor was also at work: A new way of looking at lending. Chairman and CEO Harris Simmons said that the bank shifted to a different philosophy on loan grading. “It places more emphasis on current cash flow, which is the primary source of repayment and less emphasis on the adequacy of collateral values and the strength of guarantors and sponsors,” said Simmons.
• At M&T Bank Corporation, analyst Manan Gosalia of Morgan Stanley asked if the bank planned to slow down deposit growth in 2025 and apply cash balances to fund loan growth instead.
Daryl Bible, CFO, indicated the strategy would be quite the opposite.
“I would actually like to grow deposits faster than loans, to be honest, and continue to shrink some of our non-core funding,” said Bible.
This reflects an M&T stance that Bible described as “always on.”
“When I say ‘always on’,” said Bible, “what that means is we are always out there trying to get deposits from all of our customers. We won’t pay the highest rates. We won’t pay the lowest rates. But we’ll always be out there asking for deposits.”
Added Bible: “We’ve had four consecutive quarters of customer growth in deposits. We will continue to focus on growing customer deposits.”
• At Huntington Bancshares, Steve Steinour, chairman, president and CEO, noted that in September the company announced a major expansion into North and South Carolina, including 55 branches to be opened over five years.
“This builds upon the success of our earlier investments in the commercial and regional banking teams over the past year,” said Steinour. “These markets represent some of the most attractive geographies nationally, given their size and growth characteristics.”
• At First Citizens, the SVB acquisition nearly doubled the company’s asset size, vaulting it into the nation’s top 20 institutions. So a strategic priority for 2024 has been to build out the company’s risk management framework and staffing to come up to large financial institution standards. Management indicated that during the third quarter this effort marked the greatest expense among personnel costs and professional fees.
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