Forget the big pays to be small

New York
CNN Business

Banks are in trouble. Rising interest rates should be good news for financial firms as they improve the profitability of their loans.

But banking giants such as JPMorgan Chase, Citigroup and Bank of America have been hit hard this year as volatility on Wall Street hit by the Federal Reserve’s aggressive rate hikes to combat inflation hit their trading and investment banking businesses. Fears of a recession didn’t help either.

Still, not all banks are feeling the pain. When it comes to financial stocks, it may make sense for investors to think smaller.

Compared to Wall Street-style investment banking, regional banks that rely primarily on lending and deposits fared far better than financial giants JPMorgan Chase (JPM), Citi (C), Bank of America (BAC), Goldman Sachs (GS) , Morgan Stanley (MS), etc.

The KBW Regional Banking Index (KRX), which includes smaller lenders such as Texas Capital Bancshares (TCBI), First Hawaiian (FHB) and Syracuse, N.Y.’s Community Banking System (CBU), is down just 6% this year. In contrast, the financial select sector SPDR, which holds most of the big banks, has fallen by nearly 20%.

So, can regional banks continue to hold up well, even if the Fed is expected to raise interest rates further? Larger rate hikes could lead to even bigger increases in mortgage rates, which could have a big impact on a rapidly slowing housing market.

But Steve Steinur, chief executive of Columbus, Ohio-based Huntington Bancshares, remains optimistic β€” despite concerns that a recession is looming.

“Consumers are still in good shape overall,” Steinor said in an interview with CNN Business Friday after Huntington’s latest quarterly results. Earnings, revenue and net interest income — a key measure of bank profits — all rose from a year ago and beat forecasts.

Steinour acknowledged that soaring inflation has been a problem for many consumers, especially those on lower incomes. But he said many of the bank’s middle-class and wealthier customers, as well as small businesses, who received a financial buffer from the stimulus money, didn’t end up spending.

“There is still a lot of excess savings beyond normal levels,” Steinor said, adding that this has led to higher deposits at regional banks. To that end, Huntington reported that the bank’s total deposits in the third quarter were up $1 billion from the second quarter and nearly $4 billion more than a year earlier.

Shares of Huntington Bancshares (HBAN) surged 9% on Friday’s news and rose again on Monday. The stock is down just 4% this year.

Steinour said he was encouraged that his bank clients appeared to have learned from the 2008 Great Recession and the eventual burst of the housing bubble triggered by subprime mortgages.

“Leveraged real estate? That ended in 2008 and 2009,” he said. “Consumers are much less speculative now.”

It’s helpful that Huntington’s markets, mostly in the Midwest, haven’t seen as much real estate price increases as the coastal areas.

“The Midwest doesn’t typically see a lot of housing inflation,” he said. “We may not get big peaks, but we’re not getting big dips either.” Steinour added that housing shortages and population growth in many markets, including Columbus, have helped prevent sharp declines in real estate prices.

That said, the risks that Steinour is monitoring are significant.

“There are a lot of things to worry about,” he said.

On the one hand, business customers are increasingly wary of the economic outlook. “We’re seeing companies delay buying equipment. There’s a sense of conservatism creeping in,” he said.

Consumers are also a little nervous, even though they’ve been spending money. β€œOn the street, although not as much as last year, there is still optimism,” Steinor said.

He also noted that inflation problems could last longer than most consumers, businesses and the Fed would like, and a so-called “soft landing” could be elusive as the central bank fights inflation.

“In my opinion, a soft landing is more like a mild recession with a quick recovery,” he said. But inflation has proved more challenging than expected. Therefore, we are likely to see higher rates for a longer period of time. ”

Steinour said a big rate hike might not feel good for consumers or small businesses. But he believes the Fed is taking the necessary steps to prevent “stagflation,” a period of high inflation and low growth that coincides.

“We don’t want to go back to the 1970s, where there were years of stagflation,” he said. “We have to take the pain of raising rates now and move on so the economy can rebuild and bounce back.”

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