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For superregional group, NIM expands, reserves-to-loans ratio slides

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For superregional group, NIM expands, reserves-to-loans ratio slides

The fourth quarter of 2016 was in several ways a turning point for superregional U.S. banks. On a year-over-year basis, growth of normalized earnings, operating revenue and gross loans all slowed from the recent peak of the previous quarter. One of the bright spots though was margin expansion for the majority of the group.

Of the 14 banks with total assets in the $50 billion-to-$500 billion range (excluding companies with noninterest income comprising at least two-thirds of operating revenue), nine had higher net interest margins relative to the fourth quarter of 2015. KeyCorp, Huntington Bancshares Inc., Zions Bancorp. and Citizens Financial Group Inc. experienced double-digit basis-point increases.

Gross loan growth slowed in the fourth quarter but was still at one of its highest levels in the last three-year period. A near-zero Fed Funds rate had propped up loan growth since December 2008, but now economic engines are revving over post-election optimism and talk of deregulation, although executives admit the improved sentiment has yet to make its way to their balance sheets.

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But deregulation is unlikely to have an immediate impact. PNC Financial Services Group Inc., for instance, according to comments made by executives on the company's fourth-quarter earnings conference call, may be "done investing" in consumer law compliance, but does not "think those costs go away." And after years of putting risk management systems in place, Vining Sparks analyst Marty Mosby explained, "Even if you have to do less, doing something different is just more costly."

The thing about those expensive compliance systems, Mosby explained in an interview, is that they make bank management "feel more comfortable that they have a pretty good handle on what's going on — much better than they did going into the last financial crisis." Any improvement coming for larger banks, he added, might be more in terms of "degree of constraint," as resources are redirected from busywork.

Regulatory rollbacks, moreover, might arrive to find the industry quite changed. Banks are not expected to return to riskier lines of business, for example. The pre-crisis focus on earnings growth that had banks "clawing into another business and another," has given way to a view that includes "true risk," as Mosby put it, and the search for actual return. In the case of Fifth Third Bancorp and Regions Financial Corp., Mosby pointed out, their "near-death experience" during the financial crisis has them de-risking still, reacting quickly and resolutely to events like the plunge in oil prices. Piper Jaffray's Kevin Barker, noting Fifth Third's shrinking auto portfolio, supported the company's sacrifice of net interest income growth for the sake of better risk-adjusted returns.

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Reserves-to-gross loan ratios have dropped to their lowest level in nine years. While Mosby attributes the decline to clean portfolios, he also thinks a coming accounting change could be a factor. Banks currently record losses when those losses are likely, so good asset quality translates to smaller provisions. Bankers might normally worry about shrinking reserve coverage going into the next credit cycle, but the CECL model kicks in in 2020 and wipes the slate clean.

Meanwhile, the ending of a regulatory era is not lost on bank executives. "The world's about to change" with President Donald Trump, U.S. Bancorp CEO Richard Davis said at Jan. 30 conference in Phoenix. BB&T Corp. CEO Kelly King, on an earnings call, spoke about a digital "tipping point." And bank consolidation might slow for a while before picking up again for that digital revolution. After all, Mosby argues, many boards that have "fought through the financial crisis ... lived through the recession [and] eked [their] way through the recovery process [are] finally getting to what looks to be the good times."

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