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CNN Business
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Banks are in jail. A rise in interest rates should be good news for financial firms because it increases profitability for loans.
But banking giants such as JPMorgan Chase, Citigroup and Bank of America have been hit hard this year as volatility on Wall Street over the Federal Reserve’s high inflation rate has shaken their commercial and investment banking businesses. Recession worries aren’t helping either.
Still, not all banks feel the pain. When it comes to financial stocks, it might make sense for investors to think less.
Unlike Wall Street-style investment banking, regional banks that rely on loans and bread-and-butter businesses are doing better than financials JPMorgan Chase ( JPM ), Citi ( C ), BofA ( BAC ), Goldman. Sachs (GS), Morgan Stanley (MS) and others.
The KBW Regional Bank Index ( KRX ), which includes smaller lenders such as Texas Capital Bancshares ( TCBI ), First Hawaiian ( FHB ) and Syracuse, NY-based Community Bank System ( CBU ), is down 6% this year. That compares with a nearly 20% decline for the Financial Select Sector SPDR, which contains most of the big banks.
So can regional banks continue to hold up well even if the Fed is expected to raise interest rates further? An even bigger rate hike could lead to an even bigger jump in mortgage rates, which would spell big trouble for a rapidly cooling housing market.
But Steve Steinor, CEO of Columbus, Ohio-based Huntington Bankshares, still has a good job despite the looming recession.
“The consumer overall is still in good shape,” Steinour said in an interview with CNN Business Friday after announcing Huntington’s latest quarterly results. Revenues, earnings and net interest income — a key measure of bank profits — all rose from a year ago and topped forecasts.
Steinor acknowledged that rising prices were a problem for many consumers, especially those with lower incomes. But many of the bank’s middle-class and more affluent customers, as well as small businesses, have a financial cushion from stimulus money that hasn’t raised spending, he said.
“There is still a lot of excess savings,” Steinor said, adding that this has led to an increase in deposits for regional banks. To this end, the bank’s total deposits in the third quarter increased by $1 billion from the second quarter and nearly $4 billion from the same period a year ago, Huntington reported.
Shares of Huntington Bancshares ( HBAN ) rose 9% on the news Friday and rallied again Monday. The stock is down just 4% this year.
In the year Steinur said he was pleased that the bank’s clients appeared to have learned from the 2008 boom to the Great Recession and the eventual bursting of the subprime mortgage-induced housing bubble.
“Used to flip houses? That ended in 2008 and 2009,” he said. “The user is much less speculative now.”
It helps that the markets Huntington operates in, mostly in the Midwest, haven’t seen the same dramatic spikes in real estate prices as the coasts.
“The Midwest typically doesn’t have a lot of housing inflation,” he said. “We may not get the big cones, but we won’t get the big waterfalls either.” Steinor added that the housing shortage and growing population in many of those markets, including Columbus, have helped keep real estate prices from falling sharply.
That said, there are bigger risks for Steinor to watch out for.
“There’s a lot to worry about,” he said.
For one, business customers are more cautious about the economic outlook. “We are seeing delayed equipment purchases by companies. Conservatism is creeping in,” he said.
Although they continue to spend, consumers are also a bit nervous. “On Main Street, there’s still optimism, although not as much as last year,” Steinur said.
He also pointed out that inflation may be more of a problem than many consumers, businesses and the Fed would like, and that the so-called “soft landing” by the central bank in the fight against inflation can be easily overlooked.
“A soft landing in my mind is always like a mild fall with a quick recovery,” he said. But inflation is proving more challenging than expected. So we tend to see higher prices for longer periods of time.
Steinour said large price increases may not be good for consumers or small businesses. But the Fed thinks it is doing what it needs to do to prevent “stagflation” where high inflation and weak growth happen at the same time.
“We don’t want a repeat of the 1970s, many years of inflation,” he said. “We need to take the pain of the acceleration now and move on so that the economy can rebuild and recover.”
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