After years of decline, US regional banks bounced back in 2018 on new technology investments, cost-cutting and strategic expansion.
US regional banks, despite the important role they play in many communities, have endured some tough times in recent years, with the industry reshaped by watershed events in the past decade.
Banks in the US are consolidating, according to a survey by the Federal Reserve and the Conference of State Bank Supervisors. In addition, regional and community banks are having to push back against the siren song of the fintechs, which aim to join the fraternity of directly supervised deposit-taking institutions. For these and other reasons, the number of regionals has dwindled from a high of more than 18,000 in 1985 to a bit more than 5,000 today.
And yet, regional banks gained impressive momentum in 2018, building on their efforts to cut costs and move forward with digitization. According to the Federal Deposit Insurance Corporation, commercial and savings banks increased net income by $14 billion, to $62 billion, in the third quarter, a 29.3% rise over the same period in 2017.
PNC Bank, which won Global Finance’s award for top bank in the Mid-Atlantic region, pulled net income of $5.3 billion and total revenue of $17.1 billion in 2018, according to the bank. Harnessing new technologies is a large part of PNC’s go-forward strategy.
“We are focusing our efforts and investment dollars on winning in a digital age where technology itself brings additional scale and where PNC’s focus on ease, simplicity, trust and fairness has a wide audience,” William Demchak, chairman, president, and CEO, said in his letter to shareholders. “We are digitizing products and expanding our retail presence using technology.”
This includes the bank’s national retail digital strategy, which it launched in the third quarter with a new high-yield savings account for customers in markets outside its retail branch network.
Technology is also a focus for Rockland Trust, which took the award for New England. “Last year we saw the continued technology evolution further increase customer expectations of how to access our services,” Chris Oddleifson, CEO with Rockland Trust, tells Global Finance. The bank is “vigilantly” enhancing technology products to meet client expectations, he says, including a new online account-opening platform.
Like some other regionals, Rockland is also trying to get ahead of the consolidation trend. “Consolidation within the banking industry continued at a steady pace,” Oddleifson says. “We contributed to that trend last year, acquiring Milford National Bank and announcing the acquisition of Blue Hills Bank. These additions further strengthen Rockland Trust and better position us for the future.”
MUFG Union Bank, which was named top bank for the Far West region, has opted to expand internally, adding to its wealth teams in places like San Francisco and Orange County, California, and to divisions like home loans in expanding markets such as Arizona and Nevada. MUFG is “further diversifying our mortgage portfolio and enhancing our ability to serve the needs of our clients looking to buy homes in those states,” says Tim Wennes, West Coast president.
MUFG Union Bank is also buying market share and boosting its tech spend. “In January, we completed the acquisition of Intrepid Investment Bankers to expand our Middle Market Banking Services,” Wennes reports. “We are working to enhance our digital banking experience for our clients and have brought in some new senior leaders to head that effort.”
Other regionals are focusing on cost savings and efficiencies. Zions Bancorp, which took the Best Bank award for the Rocky Mountain region, has streamlined almost every element of its operations, consolidating seven banking charters into one. That enabled it last year to eliminate its holding company, which was merged into the operating bank, and reduce duplicative regulatory relations efforts.
“Operationally, Zions consolidated 15 different loan operations sites to one primary and one back-up location, and has simplified and continues to simplify the accounting, finance, human resources and various other back-office operations,” James Abbott, executive vice president and director of investment relations, wrote in the last annual report. Zions is also investing heavily to replace its core operating systems, an overhaul it aims to complete in 2022 and which it expects will bring further efficiencies and a greater competitive advantage.
United Bankshares, which had a stellar year in 2018, earned a nod as Best Bank in the Southeast. While producing record earnings of $327 million and net earnings of $256 million, and increasing its dividend—for the 45th consecutive year—from $1.54 to $2.45, the company’s stock managed to also outperform the NASDAQ Bank Index, despite losing 7.05% (the index fell 16.17%).
In the Southwest, Comerica took the win, with earnings per share that jumped from $4.14 in 2017 to $7.20 in 2018, due in part to increased customer-driven fee income, such as card, fiduciary and brokerage fees. Dividends also grew, from $1.09 to $1.84. Growth in net interest income of 14% helped drive revenue to an all-time high. The company was able to manage loan and deposit pricing, even as rates rose throughout 2018. Comerica modernized its technology infrastructure, adopting cloud computing, enhancing its information-security program, and deploying automation to reduce manual processing and improve turnaround times.
Rounding out the US Regionals list is US Bancorp, which takes home Best Bank wins in both the Great Lakes region and the Plains region. Overall, US Bancorp saw its total non-interest income grow 5.4% year-over-year, driven by payments revenue and trust as well as investment-management fees. Full year income grew to $7.09 billion. “We continued to see strong sales activity and expanded customer relationships across all of our businesses, supported by our investments in technology and innovation,” CEO Andrew Cecere said in announcing earnings, citing also “our employees’ dedication to helping to make our customers’ financial lives simpler and more productive.”
The bank’s technology advances included integration with the three major voice-command digital assistants (Amazon Alexa, Apple Siri and Google Assist), as well as enabling digital pay through various platforms.
Early signs suggest 2019 might be another good year for US regionals. While further moves by the Federal Reserve to raise interest rates are a receding possibility, favorable tax law changes and the loosening of liquidity-testing rules will continue to help them shore up their balance sheets. Additionally, the momentum they have gained through cost-cutting, digitization and the transformation of their customer offerings may make some of them attractive acquisition targets.
Most have substantial housecleaning still to do, however. “Most regional banks have operating models that have become increasingly siloed and complex over the years,” a recent McKinsey & Co. study stated, “and are slowed down by inefficient processes, struggle to share knowledge across business lines, and deliver a subpar customer experience.” Should interest rates perhaps remain flat or even move lower again, and should the economy take a turn, regional banks may have to redouble their digital transformation and efficiency moves if they want to remain competitive in the long run.
BEST U.S. REGIONAL BANKS 2019
|Far West||Union Bank|
|Great Lakes||US Bancorp|
|New England||Rockland Trust|
|Rocky Mountain||Zions Bancorp|