(Reuters) - Higher interest rates and a tight lid on costs helped U.S. regional banks report profits above Wall Street expectations in the third quarter, but lack of further rate increases from the Federal Reserve could limit gains.
Three large regional banks - Dallas-based Comerica Inc (CMA.N), Atlanta-based SunTrust Banks Inc (STI.N), and Cleveland-based KeyCorp (KEY.N) - together earned $2.93 billion in net interest income in the July-September period, an increase of 15 percent from a year earlier.
Wall Street analysts had reckoned that these banks would earn $2.95 billion among them, according to Thomson Reuters I/B/E/S.
Third-quarter net interest margins, the difference between interest paid and earned, and a key indicator of profitability, increased by 6 basis points on average across most banks, from the second quarter, according to Instinet.
Net interest margins have benefited from the three interest rate increases since the second quarter of last year.
The Fed is expected to raise rates again in December. The odds of a December move stand at 96.7 percent, compared with 87.8 percent a week ago, according to CME Group’s FedWatch tool.
If there is no rate hike in December, it will have “some negative impact” on margin outlook for 2018, D.A. Davidson analyst Gary Tenner said.
But higher interest rates cut both ways: boosting profits even as they push up borrowing costs, capping loan growth.
KeyCorp on Thursday cut its fourth-quarter loan-growth forecast to the lower-end of its previously given range of $87 billion to $88 billion range. PNC Financial Services Group Inc (PNC.N) said on Oct 13 it expects modest loan growth in the current quarter, compared with the third quarter when it reported a 1 percent growth.
“Banks have been operating in a slow growth/low interest rate environment for a long time and have spent time bringing down expenses. Control what you can control has been the message,” Stephens analyst Terry McEvoy said.
“I think that will continue to be the case if we don’t get more rate hikes.”
SunTrust said on Friday that third-quarter non-interest expenses, which include most operating and overhead costs, declined 1.3 percent to $1.39 billion. Comerica’s non-interest expense fell 6.1 percent in the same period, the company said on Oct 17.
Several of the regional banks raised provisions for loan losses mainly to deal with possible bad loans coming after hurricanes Harvey and Irma.
Pittsburg-based PNC saw a $32 million rise in provisions, out of which $10 million were related to hurricanes. SunTrust, which has more than 400 branches in Florida, reported a $23 million rise in provisions.
Minneapolis-based U.S. Bancorp (USB.N) on Oct. 18 said it raised provisions for loan losses by 11 percent.
Reporting By Aparajita Saxena and Roopal Verma in Bengaluru; Additional reporting by Nikhil Subba; Writing by Sweta Singh; Editing by Sayantani Ghosh