Regional banks make more loans, margins narrow

CHARLOTTE, North Carolina (Reuters) - Narrower loan margins may cut into the profits of three large U.S. regional banks in the future even as they make more loans.

PNC Financial Services Group Inc and US Bancorp -- the fifth and sixth largest U.S. banks -- beat analyst expectations by setting aside less money to cover bad loans for the quarter that ended on June 30.

But the results showed a tightening of interest margins -- the difference between the interest rates that banks pay on deposits and the rates they receive for lending it.

The results highlight the difficulties regional banks face as they emerge from the credit crisis. On the positive side, loan losses are declining.

But loan demand is growing only slightly. And investor fears about the economy are pushing down longer-term bond yields, cutting into returns for lenders.

"Every day that rates stay low is a day banks' margins are going to be under pressure," said Jefferson Harralson, a bank analyst with Keefe, Bruyette & Woods Inc.

Pittsburgh-based PNC posted second-quarter net income of $912 million, or $1.67 per share, up from $803 million, or $1.47 per share, a year ago. Analysts, on average, expected $1.46 per share, according to Thomson Reuters I/B/E/S.

Minneapolis-based US Bancorp reported net income of $1.2 billion, or 60 cents per share, up from $766 million, or 45 cents per share, a year earlier. Analysts expected 53 cents a share.

Also on Wednesday, regional lender M&T Bank Corp reported net income of $322 million, or $2.42 per share, up from $188 million, or $1.46 per share, a year ago.

Regional banks are not alone in coping with low rates. Northern Trust reported a 24 percent drop in net income, which the Chicago-based company blamed on lower interest rates.

TIGHTENING MARGINS

For many regional banks, growing loan books have not translated to similar increases in interest income.

At M&T Bank, loans rose 15 percent to $58.5 billion from $51 billion a year ago, helped by the acquisition of Wilmington Trust, but net interest income rose only 3 percent to $586 million from $567 million.

The slower increase was due in part to a decline in the interest margin to 3.75 percent from 3.84 percent.

Meanwhile, US Bancorp increased its total loans 4 percent during the quarter to $198 billion from $191 billion a year ago, but its own margin shrank to 3.67 percent from 3.9 percent.

The new loans helped push net interest income to $2.54 billion from $2.4 billion a year earlier.

PNC's interest margin fell to 3.39 percent from 4.35 percent a year earlier.

PNC Chief Financial Officer Richard Johnson said during a conference call with analysts that a decline in interest-bearing assets pushed the margin down, despite an increase in interest-free deposits.

LENDING

Consumers have flooded banks with deposits, and are willing to accept low interest or no interest, as long as their money will be kept safe.

But potential returns from loans are falling. Existing, higher margin loans are maturing for many lenders, and banks are heavily competing for new loans now, Harralson said.

"You're seeing aggressive pricing," he said.

PNC, for example, noted it added $2 billion in new commercial loans during the quarter, while real estate and other lending declined.

Analysts said the decline in margin is likely to persist for several quarters as banks' higher-yielding, but now risky, real estate loans are replaced by lower-yielding commercial loans.

"You'll continue to see some modest bleed in the margin, but I think you'll still see interest income growth," said Marty Mosby, bank analyst with Guggenheim Securities.

(Editing by Robert MacMillan and Steve Orlofsky)

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