Stocks

Regional Banks Face Continued NIM Headwinds

American regional banks’ recent quarter earnings were uninspiring, as weak revenue trends weighed on the results, NIMs dropped 3 bps and loan growth was at the low end of the expectations, notes Goldman Sachs.

Ryan M. Nash and team at Goldman Sachs said in their May 6 research report titled: “Reviewing loan growth, NII and EPS risk for regional banks; FNFG to Sell (from Neutral)” that they expect NIM compression to continue until the end of the year.

Regional banks face continued NIM headwinds

According to the Goldman Sachs analysts, the 1Q earnings were characterized by both seasonally slower loan growth and continued NIM headwinds. Noting the change in the strategy adopted by the banks, the analysts point out that in 2014, banks were able to offset pricing pressures by earning asset growth. However, 1Q15 commentary suggested that the banks are now more focused on returns vs. growth, potentially leading to a deceleration of loan growth, particularly in auto, CRE and C&I.

Weak loan growth

The analysts also anticipate that NIM compression will continue until the end of the year:

NIM compression Regional Banks

Considering the renewed focus on lower-for-longer rates and potentially slowing loan growth, the analysts ran two screens for names which could be at risk of downward revisions to consensus estimates for loan growth and / or net interest income. First, they considered consensus expectations for 2015 loan growth vs. the 1Q15 annualized run-rate. They point out that though there is some seasonality in 1Q15 numbers, they noticed loan growth estimates for U.S. Bancorp, SunTrust Banks and Fifth Third Bancorp could prove to be too optimistic, while Comerica Incorporated and KeyCorp could witness some upside vs. expectations:

A few Regional Banks could miss consensus

First Niagara downgraded to ‘Sell

Nash and team at Goldman Sachs also attempted to bifurcate 2016 NII growth estimates between core growth and impact from higher rates. They point out that overall, the market is looking for 7% NII growth, including ~5% core growth and 2% from higher interest rates. Despite the market assuming the highest total growth for asset-sensitive names such as Comerica, Zions Bancorporation and Citizens Financial Group, the analysts note that core growth for this group is a lot lower. However, as can be deduced from the following graph, Huntington Bancshares, U.S. Bancorp and Fifth Third Bancorp appear to be the most at risk for core growth misses, while CMA, BBT and FNFG look to be the least at risk:

Banks with highest implied core growth in 2016 Regional Banks

The following chart captures the target price of the Goldman Sachs analysts on various U.S. regional banks:

Target price of Regional Banks - GS

Taking a deeper look at First Niagara, the Goldman Sachs analysts have downgraded it to Sell from Neutral with 5% downside to their new $8.50 12-month price target. Providing rationale to their downgrade of FNFG, they said they expect the bank’s loan growth to slow to below 4% this year as growth in large commercial lending slows.

Loan growth Regional Banks

Ryan M. Nash and team also believe FNFG’s NIM could witness outsized pressure if long rates remain flat while short rates rise. The analysts note that while keeping long rates flat with short rates rising may be an overly drastic scenario, to the extent the steepness of the curve flattens, they believe it’s fair to assume that it dampens FNFG’s rate sensitivity more so than it will that of its peers:

FNFG's NIM Regional Banks

The Goldman Sachs analysts also note that FNFG’s fee income initiatives will be a challenge.