Nov 30 (Reuters) - Squeezed by lower loan growth as interest rates finally begin to rise, regional U.S. banks have been giving more financial advice to mid-sized companies and affluent Americans to drive revenue growth.
Smaller banks, like their bigger Wall Street rivals, have aggressively cut costs since the 2008 financial crisis and trusted ultra-low interest rates to increase loan volumes.
But with the Federal Reserve's overnight funding rate now rising, albeit slowly, U.S. bank lending growth slowed to 3.5 percent at the end of the third quarter from 6.8 percent a year earlier - the slowest growth since 2013.
That has driven banks to seek new sources of revenue growth at a time when they are still cutting staffing and investment.
Experts say that investment banking and wealth management are far less capital intensive for the regional lenders and piggy-back easily on the tight relationships they tend to have with local companies and customers.
"The field is very crowded, but having a local presence is helpful to us," SunTrust Robinson Humphrey Chief Executive John Gregg told Reuters. "While the big guys will say they are focused on middle markets that's not their bread and butter."
Fifth Third Bancorp Chief Financial Officer Tayfun Tuzun told Reuters that he was not seeking to compete with Morgan Stanley, Goldman Sachs or other Wall Street firms who dominate major deals and firms.
But he said that the bank had $55 billion to $60 billion in loans to a large base of middle market clients who might have revenue running from $20 million to $500 million and are investing strongly.
"They dont get calls from a Goldman Sachs or a Morgan Stanley ... but they still do need advice," he said.
"They still buy and sell companies, they still need M&A advisory, they do privately issue debt and use risk management products themselves. We are basically addressing the needs of our client base."
Sectoral data crunched by Reuters shows interest paid on loans still remains the main driver of revenue growth. But the pace of growth in non-interest income, which includes investment banking, for many banks is faster.
U.S. Bancorp, BB&T Corp, SunTrust Banks Inc , Fifth Third Bancorp, KeyCorp and Citizens Financial Group Inc together earned $6.97 billion in non-interest income in the third quarter, up 10.6 percent from a year earlier and 15.2 percent from the second quarter.
That compares with growth in net interest income of 7.7 percent and 2 percent, respectively.
"Due to a slow revenue growth environment, banks have been looking at all avenues to provide incremental growth," said Terry McEvoy, a banking analyst with Stephens Inc.
"Wealth management and investment banking are areas where banks have made investments and (returns from those businesses) are showing up in the revenue line."
In wealth management the pickings are also rich.
The number of millionaires in the United States is at the highest since Chicago-based research company Spectrem Group started measuring it in 2004, but thresholds of - for example $250,000 to invest - mean many are too small to get personal attention from the big Wall Street firms.
Born between the early 1960s and 2000, Americans from Generations X and Y who have an average annual income of about $200,000, account for 18 percent of millionaires compared with 8 percent in 2012.
Yet only 58 percent have financial advisers compared to 72 percent five years ago, according to a study by Fidelity Investment.
SunTrust Banks has hired teams in New York and Texas in the past few months to grow assets under management and expand its geographic reach, Chief Financial Officer Aleem Gillani said on the company's third-quarter earnings call.
Fifth Third's total wealth and asset management revenue in the third quarter rose, helped by higher personal asset management revenue.
"We are also focusing on growth in wealth management through either acquisitions or expanded sales force," Tuzun said on the company's third-quarter earnings call.
All that adds up to substantial impact on revenue and profit for some of these banks. Investment banking income at Atlanta-based SunTrust, for example, rose 13 percent to $166 million in the third quarter, compared to just $98 million 18 months earlier.
Providence, Rhode Island-based Citizens Financial Group's adjusted noninterest income rose 4 percent in the third quarter, helped by strength in the lender's capital markets fees.
"We like smaller transactions - about $300 million," said Donald McCree, vice chairman and head of commercial banking at Citizens. "We are extremely good in that niche and we don't see the larger banks coming down to that size range." (Reporting by Sweta Singh in Bengaluru; Additional reporting by Aparajita Saxena)