Regional Banks Aren’t Exactly on Fire

by Dan Burrows | January 27, 2012 11:25 am

Like their bigger, national brothers, it’s been a mixed-to-disappointing fourth-quarter earnings season for the country’s regional banks. However, as with the sector’s larger firms, regional banks are outperforming the broader market so far in 2012, and, more important, balance sheets are on the mend.

The SPDR KBW Regional Banking ETF (NYSE:KRE[1]), a proxy for regional bank stocks, is up nearly 6% year-to-date, outperforming the S&P 500 by about a percentage point. That’s a good indication that as tough a quarter as it’s been for many regionals, it wasn’t as bad as the market feared.

Naturally, regional banks’ mixed performances reflect the different challenges and paces of recovery in different parts of the country. On Wednesday, KeyCorp (NYSE:KEY[2]), a Northern bank, and Regions Financial (NYSE:RF[3]), a firm based in the Southeast, both reported drops in revenue and profitability. However, KeyCorp generated more new loans than Regions, thanks partly to an improvement in Midwest manufacturing activity. Regions continued to be hampered by the weak housing market in its area of operation.

The same dichotomy can be seen in results from PNC (NYSE:PNC[4]) and US Bancorp (NYSE:USB[5]). PNC, a bank with operations in the Midwest and mid-Atlantic states (and also in the housing quagmire of Florida), missed Wall Street’s profit estimates, but beat on revenue. US Bancorp, a Midwest firm, squeaked past Street profit forecasts and easily beat on revenue.

Those anecdotal examples reflect the sector’s wider trend. True, lending is picking up, more borrowers are paying debts on time and credit quality is slowing getting better — but business remains tough, and future bottom-line results remain frustratingly opaque.

“Profitability remains challenged, particularly at the large regionals,” writes Melissa Roberts, regional bank analyst at Keefe, Bruyette & Woods, in a new note to clients. “Capital and credit improvement continues, and loan growth is back with banks posting both year-over-year and quarter-over-quarter growth.”

That said, it’s been a tougher earnings season for regional banks than for the overall market. More than 50% of companies in the S&P 500 having reported so far have exceeded analysts’ average estimates. That’s not the case with regional banks.

Of the 64 regional banks sampled by KBW, only 48% beat Street estimates so far, while 36% missed analysts’ forecasts. The remaining 16% matched estimates. That’s quite a letdown from the third quarter, when 55% percent of regional banks beat estimates.

Perhaps most troubling, “the 13 large regionals that reported thus far have posted weaker results with 54% missing estimates,” Roberts writes.

As we noted in our review of big bank earnings[6], cost cuts, accounting quirks and other noncore items are helping regionals’ results look more presentable this quarter — or at least better than the market was discounting.

But as with big banks, that hardly means regionals are back to business as usual. The overhang of the housing crisis, the anemic economic recovery and sluggish small-business growth make it hard to separate the value stocks from the value traps among regional banks. For now, at least, stock-pickers would be wise to look for clearer risk/reward scenarios in other sectors.

  1. KRE:
  2. KEY:
  3. RF:
  4. PNC:
  5. USB:
  6. our review of big bank earnings:

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