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Revenue, margins increase alongside profits for US regional banks in Q4'17

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Revenue, margins increase alongside profits for US regional banks in Q4'17

Fourth-quarter 2017 results of U.S. regional banks were generally positive, marked by year-over-year growth in normalized earnings and revenue, as well as higher net interest margins.

S&P Global Market Intelligence examined the financial results of 35 public U.S. banking institutions with total assets between $20 billion and $50 billion. On a median basis, the group's normalized revenue growth was 9.5% year over year. Normalized EPS growth was even stronger, at 16.9%. The median efficiency ratio was 57.44% in the recent quarter, an improvement from 60.18% a year ago.

Moody's expects banks to deliver improved profitability in 2018, citing higher interest rates, a strong economy and tax cuts, it said in a Feb. 7 press release.

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The enactment of U.S. tax reform substantially affected fourth-quarter 2017 results for many U.S. banks. For regionals, the median effective tax rate for the quarter climbed to 42.16% from 32.24% a year ago. Only three regional banks reported negative income tax provisions during the quarter — Miami Lakes, Fla.-based BankUnited Inc.; Wayzata, Minn.-based TCF Financial Corp.; and Chicago-based MB Financial Inc.

BankUnited recorded a negative $298.9 million income tax provision, compared to $28.8 million in the 2016 fourth quarter. The company's normalized EPS climbed 45.8% year over year to 86 cents, surpassing the S&P Capital IQ consensus estimate by 25 cents.

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Of the 35 regionals, Westbury, N.Y.-based New York Community Bancorp Inc. saw the biggest year-over-year decline in normalized EPS and revenue, down 25.0% and 14.8%, respectively. The company posted year-over-year margin compression of 38 basis points, and its efficiency ratio worsened to 50.11% in the last quarter of 2017, from 47.87% in the last quarter of 2016. The company reported a one-time net tax benefit of approximately $42 million during the recent quarter, which includes the re-measurement of its deferred tax liability. In 2018, the company expects its effective tax rate to be about 26.5%.

Piper Jaffray analyst Matthew Breese, in a Feb. 1 research report, characterized New York Community's fourth-quarter 2017 earnings as a "mixed bag." He expects the company to "underperform more asset-sensitive regional bank peers," citing below-average profitability and EPS growth. The analyst added that "funding cost increases are set to outpace increases on the loan and securities side, driving NIM compression through 2018."

In terms of net interest margin, the median for the group increased to 3.51% in the 2017 fourth quarter from 3.46% in the previous quarter and 3.28% in the 2016 fourth quarter. Twenty-four of the banks posted higher NIMs on a year-over-year basis.

Meanwhile, the median gross loan year-over-year growth rate for the group is flatlining around 8%. Loans have been growing faster than loan loss reserves, as the reserves-to-loans ratio declined significantly to 0.89%.

With the growth in total bank loans lessened to be more in line with the pace of nominal gross domestic product expansion, Moody's noted, and "the slower loan expansion also makes less likely that banks will become more aggressive in deposit pricing in order to attract the deposits needed to fund that progression."

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