By Clayton Browne
Analysts at Sterne Agee have been taking a look at regional banks to determine their health and where they stand in the investment world. While they do have some positive aspects, analysts are concerned to find limited avenues for revenue growth in the short term. Stock performance has been relatively lackluster for the SPDR S&P Regional Banking ETF (KRE), which is down -2.04% year to date. The regional banks' fortunes are tied to the continued low interest rates from the Federal Reserve. With talks of a rate hike next year, regional banks could be impacted and preparations are underway. Analysts at Sterne Agee believe that Fifth Third Bancorp (NASDAQ:FITB), BB&T Corporation (NYSE:BBT), and Comerica Incorporated (NYSE:CMA) are the top regional bank stocks in the industry.
Regional banks: Various factors impact loan growth rate
Turning to total loan growth, we are seeing a steady downtrend in loan growth since start of 2014. First quarter 2014, loan growth grew 6.6%. Second quarter saw the high growth of the year, at 6.8%, but then began to slow in the third quarter to 5.5%, and the slide continued to 2.7% in fourth quarter 2014. Sterne Agee analysts say that the fluctuation in the loan growth rates was due to lower mortgage balances and other loans that were med up of Fed Funds, reverse repos with nonbanks, etc. Excluding these volatile aspects from the loan growth, we get a revised first quarter loan growth of 8.5%, 8.4% in second quarter, 6.6% in third quarter and 6% in the fourth quarter 2014. While the exclusion of mortgages, Fed Funds, repos, etc had a positive impact on the loan growth rates, we are still seeing a downtrending stature in the loan growth.
Quarterly deposit growth has disappointed in fourth quarter 2014, were it fell to 1.2% from 4.9% in the third quarter. Deposit growth excluding large time saw fourth quarter deposits fall nearly -5%, compared to a gain of 6.1% in the third quarter. Quarterly savings growth jumped 10.7% in the fourth quarter, up from 5.4% in third quarter. However, demand deposit growth continues to fall, -14% in the fourth quarter.
Regional banks: Delinquent loans
Additionally, it is important to take a look at banks and the percentage of loans that are late or delinquent. This can help determine risk and default possibilities. Capital One Finance Corp. (NYSE:COF) has the largest holding of delinquent loans, as of the third quarter 2014, at 2% of total loans, meanwhile Zions Bancorporation (NASDAQ:ZION) has the lowest amount of delinquent loans, with 0.22% of total loans that are late or delinquent.
Overall, the regional banking space is facing a weaker revenue growth environment and they have limited options to generate revenue when interest rates are near all time lows. Regional banks will continue to make less interest on CDs, loans, mortgages, etc due to the fact that the Federal Reserve rate remains low. Upgrading the interest rate will allow these regional banks to change higher interest rates and therefore see revenue growth come back.