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Without big Wall Street trading arms, regional banks lean on mortgages and fees to beat earnings

A man walks past the Wall Street Charging Bull in New York, the United States, March 24, 2020.

Wang Ying | Xinhua News Agency | Getty Images

Several banks reported surprisingly strong second-quarter results during the opening week of earnings season, but the smaller national and regional banks had to rely on different business lines than their big-name competitors.

Major banks, including Citigroup, JPMorgan and Morgan Stanley used massive trading revenues to beat profit expectations despite the continued struggles of the United States economy during the coronavirus pandemic. Those trading units tend to perform best when markets are volatile, helping to guard the major banks against economic struggles.

Some of the mid-sized banks also had counter-cyclical help, as lower interest rates boosted mortgage refinancings even as they hurt net interest margins. Success of the mortgage business lines contributed to stronger-than-expected results for US Bancorp and the smaller Citizens Financial Group

Citizens CEO Bruce Van Saun said the combination of low mortgage rates, high margins and people looking to move during the summer created a “perfect storm” for the mortgage business. He said he expected the second quarter represented the peak of the mortgage business during this cycle but that it should remain an area of strength.

“We took the view that the second quarter was so strong, such a gangbusters quarter, that it’s unlikely to repeat as we remove some of the seasonal factors in the second half of the year, but we still think it’s going to be pretty darn good,” Van Saun said. 

For US Bancorp, RBC Capital Markets and Morgan Stanley, citing revenue growth from fees, raised their earnings estimates for the bank following the earnings report. 

“Though USB reports results below its industry leading profitability levels, we believe the company’s strong underwriting standards and top notch management team will will carry the day through these difficult times,” RBC said in a note.

The impact of the pandemic downturn for banks can be most easily seen in the provision for credit losses. That measure has jumped over the last two quarters as banks prepare for loans to go bad during the economic downturn. PNC Financial booked a $2.5 billion provision for the quarter, resulting in negative earnings from operations for the quarter. 

One of the questions raised on Citizens’ earnings call and in a note by Piper Sandler was whether the bank’s provision for credit losses of $464 million was big enough.

Van Saun, who described his view of the economic recovery as improvement in a “sawtooth pattern” that included fits and starts based on the health situation, said he felt confident the provisions were sufficient for his bank’s business mix, which includes a much smaller reliance on credit cards than some of the larger players.

“It’s very hard to do a read across all banks with different portfolios, different compositions of where their loan assets reside, and just say ‘Hey, that number’s bigger than that number,’ so they’re more prudent, and these other people are going to have to catch up,” Van Saun said. “It’s not the case. You really have to look at the granular level detail.”

The bank’s stock opened higher after its earnings announcement but trended downward and then turned negative in afternoon trading. Citizens’ stock is down roughly 38% year to date, mirroring the decline for the SPDR KBW Regional Banking ETF.

Some other regional banks that are similar in size to Citizens are slated to report earnings next week, including Comerica on Tuesday and Fifth Third on Thursday. 

—CNBC’s Michael Bloom contributed to this story.

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