A pair of regional U.S. banks posted first-quarter earnings gains of more than 25% as a result of increased lending and lower credit costs and loan-loss provisions.
The results, from Minneapolis-based U.S. Bancorp (USB) and Dallas-based Comerica Inc. (CMA), reinforce the notion that smaller, regional-based banks are recovering more strongly from the financial crisis than the large integrated ones.
The disparate recovery rates are also reflected in how the stock market values the regional banks compared to their still-struggling, global peers: Many smaller and regional banks are trading at around "book value," while the big banks trade at a discount to book. Book value is the net asset value of a company.
Keefe Bruyette & Woods recently noted that most U.S. banks, other than those deemed globally systemically important, are trading about on par with book values, while most of those deemed globally significant are trading below their book values.
With the banking giants trading below book, the market is still factoring in the risks of the uncertain global asset values and heightened capital standards with which they continue to grapple. The shares of regional banks, noted KBW, are trading around par with their book value, and even commanding share prices above book value amid anticipated merger activity.
Meanwhile, domestic U.S. banking institutions have built up significant excess capital that managements are eager to use to buy back stock.
Results so far this earnings season for the banking majors have also been mixed; Citigroup Inc.'s (C) income and revenue declined 2% from year-ago levels, and profits fell 3.1% at J.P. Morgan Chase & Co. (JPM), even as revenue rose, because of higher legal expenses and charges related to the value of its own debt.
At the regional banks, increased lending and better loan performance also signal an economy that continues to be on the mend, with bankers regaining their willingness to extend capital. In a prepared statement, U.S. Bancorp Chief Executive Richard K. Davis said: "The slow, but steady, economic recovery contributed to the continued improvement in our credit quality this quarter."
Shares of both banks rose as the market opened, with Comerica shares jumping $1.62 to $32.48 and shares of U.S. Bank rising 17 cents to $31.33. U.S. Bancorp shares are up nearly 16% so far this year, and Comerica's stock is up nearly 25%.
At U.S. Bancorp, first-quarter profits totaled $1.34 billion, up 28% from $1.05 billion in the same period last year. Per-share earnings rose to 67 cents from 52 cents a share a year ago, topping the 64 cents expected by analysts polled by Thomson Reuters. Revenue rose 9.1% to $4.93 billion.
The large regional bank has been one of the strongest performers in the banking industry, with solid lending demand aiding its momentum and helping to offset some of the continued pressure the sector faces from ultra-low interest rates. Average total loans at the bank increased 6.4% in the latest period amid a 17% jump in commercial borrowing and 26% surge in commercial and commercial real-estate commitments.
Meanwhile, credit costs continued to decline. Loan-loss provisions fell to $481 million in the first quarter, down from $755 million a year earlier and $497 million in the fourth quarter.
Comerica reported a profit of $130 million, up 26% from $103 million in the year-earlier period. On a per-share basis, earnings rose to 66 cents from 57 cents. The year-earlier period included 12 cents a share in restructuring and acquisition charges. Analysts polled by Thomson Reuters had most recently forecast earnings of 55 cents a share.
Net-charge offs, or loans Comerica doesn't think are collectible, were at the lowest level since the third quarter of 2007, falling to 0.4% of average loans from 1.03% a year earlier and 0.6% in the prior quarter.
The regional bank, which is mainly a commercial lender, has seen its earnings mostly improve over the past year as it sets aside less money for potential loan losses and makes more loans. Loan-loss provisions fell to $23 million from $49 million a year earlier. In the fourth quarter, loan-loss provisions were $19 million. The company saw sequential total loan growth of 1% on a period-end basis, driven by a 3% increase in commercial loans.
Last year, Comerica acquired Sterling Bancshares Inc. in a bid to grow its business in the booming economy in Texas. Last month, Comerica said it would buy back stock and planned to raise its dividend as a sign of its good health. Still, the bank struggles with low interest rates, and Moody's Investors Service recently downgraded the company's senior debt rating, saying its profit potential is constrained by costs.
-By Christian Berthelsen, Dow Jones Newswires; 212-416-2381; firstname.lastname@example.org.
--Mia Lamar and Kristin Jones contributed to this article.
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