This Midwestern bank is doing way better than the giants of Wall Street

New York
CNN Business

Banks are in trouble. Rising interest rates should be good news for financial companies, as it increases the profitability of loans.

But banking giants like JPMorgan Chase, Citigroup and Bank of America have been hit hard this year as volatility on Wall Street from the Federal Reserve’s massive inflation-fighting rate hikes slammed their commercial banking business. and investment. Recession worries aren’t helping either.

Yet not all banks feel the pain. When it comes to financial stocks, it can make sense for investors to think smaller.

Regional banks, which rely primarily on the bread-and-butter business of lending and deposit-taking as opposed to Wall Street-style investment banking, are doing much better than financial giants JPMorgan Chase (JPM), Citi (C), BofA (BAC), Goldman Sachs (GS), Morgan Stanley (MS) and others.

The KBW Regional Banks Index (KRX), which includes smaller lenders such as Texas Capital Bancshares (TCBI), First Hawaiian (FHB) and Syracuse, NY Community Bank System (CBU), fell just 6% This year. That compares with a drop of almost 20% for the SPDR Financial Select Sector, which owns most of the big banks.

So can regional banks continue to hold up well even though the Fed is expected to raise interest rates further? Larger rate hikes will likely lead to an even larger rise in mortgage rates, which could significantly harm the rapid slowdown in the housing market.

But Steve Steinour, CEO of Ohio-based Columbus, Huntington Bancshares, remains optimistic – despite worries about a looming recession.

“The consumer is still generally in good shape,” Steinour said in an interview with CNN Business on Friday after the release of Huntington’s latest quarterly results. Profits, revenue and net interest income – a key measure of bank earnings – 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, had a financial cushion from the stimulus money they hadn’t finished spending.

“There is still a lot of excess savings that exceeds the norm,” Steinour said, adding that this has led to increased deposits for regional banks. To that end, Huntington said the bank’s total deposits in the third quarter were up $1 billion from the second quarter and nearly $4 billion from the same period a year ago.

Shares of Huntington Bancshares (HBAN) jumped 9% on the news on Friday and rose again on Monday. The stock has only fallen 4% this year.

Steinour said he was heartened that his bank’s customers seemed to have learned from the buildup of the Great Recession and the eventual bursting of the subprime mortgage-induced housing bubble in 2008.

“Taking advantage of house flips? It ended in 2008 and 2009,” he said. “The consumer is much less speculative now.”

It helps that the markets where Huntington operates, mostly in the Midwest, haven’t seen the same dramatic spikes in real estate prices as on the coasts.

“The Midwest generally doesn’t have a lot of housing inflation,” he said. “We might not get the big peaks, but we won’t get the big drops either.” Steinour added that housing shortages and population growth in many of its markets, including Columbus, have helped keep real estate prices from falling dramatically.

That said, there are big risks that Steinour is watching out for.

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

On the one hand, professional customers are increasingly wary of the economic outlook. “We see that equipment purchases are postponed by companies. There is a sense of conservatism taking hold,” he said.

Consumers are also a little more nervous, even though they continue to spend. “On Main Street, there’s still optimism even though it’s not as much as last year,” Steinour said.

He also noted that inflation is likely to be a problem for longer than most consumers, businesses and the Fed would like, and that a so-called “soft landing” will likely be elusive in the future. the central bank’s fight against inflation.

“A soft landing in my mind has always been more like a mild recession with a quick recovery,” he said. But inflation is proving more difficult than expected. So we are likely to see higher rates for a longer period.

Steinour said big rate hikes might not be nice for consumers or small businesses. But he thinks the Fed is doing what is necessary to prevent “stagflation,” a period when both high inflation and low growth occur simultaneously.

“We don’t want the 1970s anymore where there are many years of stagflation,” he said. “We need to bear the pain of rate hikes now and move forward so the economy can rebuild and rebound.”

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