Banks are in a bind. Rising interest rates should be good news for financial firms as they increase the profitability of loans.
But banking giants like JPMorgan Chase, Citigroup and Bank of America have been hit hard this year as volatility on Wall Street amid the Federal Reserve’s massive rate hikes to fight inflation has hurt their commercial and investment banking businesses. Worries about a recession aren’t helping either.
Still, not all banks are feeling the pain. When it comes to financial stocks, it can make sense for investors to think smaller.
Regional banks, which rely primarily on the bread and butter of lending and deposit-taking as opposed to Wall Street-style investment banking, are doing much better than financial giants JPMorgan Chase (JPM), Citi (C), BofA (BAC) and Goldman Sachs (GS), Morgan Stanley (MS) and others.
The KBW Regional Bank Index (KRX), which includes smaller lenders like Texas Capital Bancshares (TCBI), First Hawaiian (FHB), and Syracuse, NY-based Community Bank System (CBU), is down just 6% this year . This compares to a nearly 20% decline for the financial select sector SPDR, which holds most of the big banks.
So can the regional banks continue to hold up well even if the Fed is expected to hike rates further? More large rate hikes are likely to result in an even larger increase in mortgage rates, which could weigh heavily on the rapidly slowing real estate market.
But Steve Steinour, CEO of Huntington Bancshares, based in Columbus, Ohio, remains bullish — despite concerns about a looming recession.
“The consumer, in general, is still in good shape,” Steinour said in an interview with CNN Business Friday following the release of Huntington’s latest quarterly earnings. Earnings, revenue and net interest income — a key metric for bank profits — were all up year over year and beating forecasts.
Steinour acknowledged that the rise in inflation is a concern for many consumers, particularly those on low incomes. But he said many of the bank’s middle-class and wealthier customers, as well as small businesses, have a financial cushion of stimulus money that they haven’t spent.
“There is still a lot of excess savings that is above the norm,” Steinour said, adding that this has led to a surge in deposits at regional banks. To that end, Huntington reported that the bank’s total deposits increased by $1 billion in the third quarter from the second quarter and nearly $4 billion from the same period a year ago.
Huntington Bancshares (HBAN) shares rose 9% on Friday news and rebounded on Monday. The stock is down just 4% this year.
Steinour said he was heartened that his bank’s customers appeared to have learned from the build-up to the Great Recession and the eventual bursting of the subprime mortgage-induced housing bubble in 2008.
“Use up to flip houses? That ended in 2008 and 2009,” he said. “The consumer is now much less speculative.”
It helps that the markets in which Huntington operates, primarily the Midwest, haven’t seen the same dramatic increases in home prices as those on the coasts.
“In the Midwest, you don’t usually have big housing inflation,” he said. “We may not get the big spikes, but we don’t get the big falls either.” Steinour added that housing shortages and growing populations in many of its markets, including Columbus, helped prevent the dramatic collapse in home prices.
However, there are major risks that Steinour monitors.
“There’s a lot to worry about,” he said.
For one thing, business customers are becoming increasingly cautious about the economic outlook. “We are seeing companies defer device purchases. There’s a sense of conservatism creeping in,” he said.
Consumers are also a bit more nervous, although they continue to spend. “There’s still optimism on Main Street, although not as much as last year,” Steinour said.
He also noted that inflation is likely to be a problem for longer than most consumers, businesses and the Fed would like, and that a so-called “soft landing” in the central bank’s fight against inflation is likely to be elusive.
“For me, a soft landing has always been more like a mild recession with a quick recovery,” he said. But inflation is proving harder than expected. So we’re likely to see higher rates for a longer period of time.”
Steinour said big rate hikes might not feel good for consumers or small businesses. But he believes the Fed is doing whatever it takes to prevent “stagflation,” a period when both high inflation and weak growth coexist.
“We don’t want to go back to the 1970s where there are a lot of years of stagflation,” he said. “We must now endure the pain of rate hikes and move on so the economy can rebuild and recover.”