The Federal Reserve, on August 6, 2012, reported its credit officer survey. The survey indicated strong commercial real estate (CRE) loan demand, while at the same time it reported expectations of an improvement in the credit quality. Much of this improvement was in the Midwestern region of the U.S. We have identified two Midwestern centric banks, namely Huntington Bancshares (HBAN) and Comerica Inc (CMA), which we believe are in a position to benefit from the said improvement.
Key Survey Findings
The trends for loan demand are improving, and the survey suggests that this is particularly true for the Southwest and the Midwestern populations. These U.S. regions are experiencing strong demand for commercial and real estate loans, compared with the demand in Southeastern regions of the U.S. In the Midwestern and Southwestern regions of the country, about 50% of loan officers reported CRE loan demand as the strongest, while only 10% of the officers reported strong CRE loan demand in the Southeastern region.
The improvement in the credit quality is expected to continue, but at a lower pace. In the Midwestern region, over 80% of respondents expected the cost of credit to recover, while 75% of the respondents expected the cost to remain high through 2014. Around 20% of the officers reported an increase in deposit competition, while 13% reported a decrease.
Loan pricing is expected to deteriorate in the third quarter of the current year, particularly in the Midwestern, Mid-Atlantic and West Coast regions of the country. Price will remain stable in the Southeastern and Southwestern regions.
Regional Banks that will benefit
Looking at the survey results, our most favorable regional banks are Huntington Bancshares and Comerica Inc . Both operate in the Midwestern region of the U.S.
The performance for the second quarter of the current year remained stable, with the bottom line at $152.7 million. The bank witnessed an 11% decline in its non-interest income in the second quarter. The impact of the decline in non-interest income was partially offset by a decline in non-interest expense, and a hike in net interest income. Over the previous quarter, the net interest margin for the bank increased 2bps to 3.42%. The increase in net interest income was primarily associated with a lower cost of funds. Driven by growth in commercial and industrial loans, the bank witnessed a 5% surge in average total loans. Net charge offs remained stable at 0.82% of average loans. The bank has a robust capital base, as is reflected by its Tier 1 common ratio of 10.08%.
The bank reported strong results when it disclosed its second-quarter performance. The bottom line surged by 11% over the previous quarter to $144 million from the previous quarter's $130 million. Much of this improvement in the bottom line was associated with the decline in non-interest expense and lower loan loss provisions. The net interest margin that the bank earned during the second quarter declined. Compared with the previous quarter, non-performing loans declined, reflecting the improvement in non-performing loans. The loans portfolio and deposits during the second quarter swelled. Both are expected to surge in the remaining half of 2012. The robust capital base improved slightly over the previous quarter. The bank had a tangible common equity ratio of 10.27% at the end of the second quarter of the current year.
Compared with the book value multiple of 1.15 times for Huntington Bancshares, the book value multiple of Comerica is 0.89 times.