Trader Talk

Regional bank earnings are showing the bigger problem with banks

Market opens down after GS miss

If you want a microcosm of the problem with banking, you should forget about Goldman Sachs and look at what the big regional banks like Regions Financial and Comerica are saying.

I have nothing against Goldman, but I am primarily interested in how the U.S. economy is doing through the eyes of banks. Goldman is not a good candidate for this. The company gets 40 percent of its revenue outside the U.S., and it relies on trading for a large part of its revenues.

Regional banks do not have trading operations and operate solely in the U.S.

Both Regions Financial (based in Alabama) and Comerica (based in Texas) reported today.

Regions has a huge retail operation: nearly 60 percent of their revenues are on the consumer side. Comerica is slightly more focused on corporate lending. Both have substantial wealth management divisions — they manage money for wealthy people. It's more than 10 percent of revenues for both companies.

Both beat on the top and bottom line, but the full year guidance for both is very similar — and very telling.

Let's start with Regions Financial. What we care about is guidance. What matters about these banks are: 1) loan growth, both consumer and commercial, 2) net interest income and net interest margin, which is how much money the banks are making between what they are paying out on deposits and lending out in the form of loans, and 3) how well the loans are performing (credit conditions). To a lesser extent, fee income is also important — it's been growing as a percentage of bank revenues — but it tells you more about how much banks can charge for things like bank withdrawals than it does about the state of the economy.

The Comerica Bank Tower stands in Dallas, Texas.
Matt Nager | Bloomberg | Getty Images

Here's what Regions Financial said they expect for 2017:

  • Average loans ex-auto: flat to slightly down, below prior guidance. A negative.
  • Net interest income: growth of 3-5 percent, up from previous guidance of up 2-4 percent, reflecting the benefits from rate hikes. A positive.
  • Fee income: up 1-3 percent, from prior guidance of up 3-5 percent. A negative.

Two negatives and a positive.

Let's look at Comerica's guidance for 2017:

  • Average loan growth: up 1-2 percent. Weak!
  • Net interest income: higher. A positive.
  • Provisions for credit losses: lower. A modest positive.
  • Fee income: up 4-6 percent. A modest positive

Very similar. What's the bottom line so far? Average loan growth is weak, that is a major problem. Net interest income growing is a definite positive, but how long can that continue? If bond yields keep dropping and the yield curve keeps flattening, then those positive trends for net interest margin are going to change.

You see why banks are weak? They were weak going into the quarter, but now the guidance is essentially confirming the weak prognosis. No wonder everyone wants fewer taxes and regulations! It changes the topic!