67 WALL STREET, New York - February 16, 2012 - The Wall Street Transcript has just published its Southeast & Midwestern Banks Report offering a timely review of the sector to serious investors and industry executives. This Southeast & Midwestern Banks Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics covered: Consolidation in Regional Banking - Growth in U.S. Midwest - Regulatory Outlook Gains Clarity
Companies include: BBCN Bancorp (BBCN); Bank of America (BAC); Cathay (CATY) and many more.
In the following brief excerpt from the Southeast & Midwestern Banks Report, interviewees discuss the outlook for the sector and for investors.
Gary P. Tenner, CFA, is a Vice President and Senior Research Analyst at D.A. Davidson & Co. He joined D.A. Davidson in October 2010, covering the bank and thrifts sector, with more than 10 years of experience as a sell-side Equity Analyst. Before Davidson, Mr. Tenner was associated with Soleil Securities Corporation and SunTrust Robinson Humphrey, where he focused on coverage of Southeastern banks and thrifts. Mr. Tenner earned a bachelor's degree from The State University of New York at Buffalo, and an MBA from Georgia State University.
TWST: What's going on in that space? The big ones are the ones that everybody pays attention to.
Mr. Tenner: The regionals that I cover; names like Comerica (CMA) and Zions (ZION) particularly, they both fall at the lower end of the SIFI banks and both are part of the CCAR stress test coming up here in the early part of 2012. Beyond those institutions, we remain in a pattern where we've not seen a huge amount of loan growth from these companies, but seem to be starting to see some early traction, I would say, on the commercial side. A lot of the banks have been originating new credit lines, though we've not seen customers draw down and really start utilizing those credit lines. Until we start seeing greater utilization of credit lines, I expect revenue and margins are going to be under pressure.
TWST:We have the regulatory landscape set at this point. How are these banks positioned relative to what the regulators want?
Mr. Tenner: For those banks in particular, the impact from some of the new regulatory rules is some loss of fee income obviously related to Dodd-Frank and the Durbin Amendment. As it relates to capital, I think Comerica, particularly, is pretty clearly considered to be in line with what the regulators want. From my perspective, Zions is in line or very close to being in line given the different stress-test scenarios. So for them, there is a little more uncertainty in the mix in terms of when the CCAR results come out, whether or not they're told to raise capital to repay TARP. I think it is pretty close one way or the other and even if they do raise capital, I don't think it would be a very large number.
TWST: Are these banks seeing loan demand or are they sitting on their hands?
Mr. Tenner: I think really there's been a lot of moving around of market share of banks, a lot of refinance of commercial real estate loans from one bank to the other. As I mentioned, Comerica has originated a very large amount of new credit lines over the past year or 18 months, but we've simply not seen an increase in utilization. As a result, the balance sheet benefits from the effort that has been put into originating loans has not been felt yet.
TWST: You mentioned the loss of fee income for banks. What are they doing to offset that and get back to where they were or can they get back to where they were?
Mr. Tenner: I think that's going to be a little bit longer timeline, although I do expect the majority of banks over time will tweak their programs and products to try to recover some of what they've lost. That said, as we saw in the latter part of 2011, some of the bigger banks that went ahead and started jacking up fees on some of their checking-account products were pretty soundly rebuffed by the public and the media, so they backtracked pretty rapidly. I think it's going to be more a question of banks just organically raising some fees here and there over time to try to recover some of what has gone away.
TWST: Does that mean bank returns are not going to be what they were at the peak of the past cycle?
Mr. Tenner: I think that's the case for a lot more reasons than just that fee issue. Yes, you're going to have some fees go away and that's going to have a negative impact, but obviously banks are carrying more capital today than they were in the past, and that, by definition, is going to reduce returns relative to where they've been in the past. I don't suspect we are going to get back to the peak levels of profitability that we had in 2004-2005 because that was really a perfect storm of positive drivers for the banking sector. You had a booming economy; a steep-enough yield curve to generate nice margins; a lot of construction lending, which number one, grew balance sheets, and number two, offered very nice yields; and you also had fee income coming in on the mortgage side of the business. I don't think we're going to be back to those times any time soon.
TWST: Do the valuations of these banks reflect that at this point?
Mr. Tenner: If you look at my coverage list, the banks that I cover with an excess of $1 billion in market cap are trading around 1.6 times tangible book value. The banks under $1 billion market cap are trading around 1.2 times tangible book value. The larger banks tend to be a bit more profitable, with less excess capital compared to the smaller institutions. So certainly as banks have gotten back to profitability and have gotten healthier, we are seeing that positive reflected in multiple expansion, but still shy of the stood several years ago when bank returns were higher than they are today.
TWST: Has the loan-loss problem become less of an issue or is it still an overhang?
Mr. Tenner: It's certainly much less of an issue. We're at a point where in some cases, net charge-offs are still elevated and NPAs are elevated. But with the reserve buildup of the past few years, most banks are not having to put aside additional reserves. You've got a lot of banks, of course, that have had zero or negative provisions in recent quarters. In general for the group, I think the income statement impact of credit losses is largely in the rearview mirror, but in terms of the actual loss recognition, there seems to still be a bit more to go.
TWST: Are we somewhat back to where the banks would like to be at this point?
Mr. Tenner: Again, I think we're back to where the quarterly income statement impact of credit costs, at least on the provision expense, is probably normalized. And in fact, in some cases, is probably unsustainably low right now. That said, we're still seeing an impact on the income statement from foreclosed real estate and those numbers are still above what our long-term expectation would be.
TWST: Is that going to work itself out over the next couple of quarters or is it going to take a longer period than that?
Mr. Tenner: I think you're going to see a gradual decline in those costs as banks are able to dispose of foreclosed assets. Obviously, that's a process, and some banks have been more aggressive than others in doing so. So yes, it's going to take a little while longer. Most banks are quite a bit lower on that line item today than two years ago, but it's not quite gone back to the minimal levels you might see in a healthier economic environment.
TWST: At the peak of the last cycle, we saw a tremendous expansion on the part of the banks in terms of branches and physical facilities. Is that over or are we likely to see that start up again?
Mr. Tenner: It would seem more rational to not continue to expand with brick-and-mortar branches, particularly as the loss of some fees and things of that nature ends up with branches being relatively less profitable. Reverting back to a leaner model might make more sense from a capital-investment perspective.
TWST: How about from a consolidation point of view? Is there room for that to take place in this changed world?
The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This Southeast & Midwestern Banks Report is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
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