How this Midwest bank is doing much better than Wall Street giants

By Paul R. La Monica, CNN Business

Banks are in a bind. Rising interest rates should be good news for financial firms because they boost profitability for loans.

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

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

Regional banks, which mainly rely on the bread and butter businesses of lending and taking deposits as opposed to Wall Street style investment banking, are doing much better than financial giants JPMorgan Chase, Citi, BofA, Goldman Sachs, Morgan Stanley and others.

The KBW Regional Bank Index, which includes smaller lenders such as Texas Capital Bancshares, First Hawaiian and Syracuse, NY-based Community Bank System, is down just 6% this year. That’s compared to a nearly 20% drop for the Financial Select Sector SPDR, which holds most of the big banks.

So can regional banks continue to hold up well even as the Fed is expected to jack up interest rates even further? More big rate hikes are likely to lead to an even bigger jump in mortgage rates, which could put a major dent in the rapidly slowing housing market.

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

“The consumer is generally still in good shape,” Steinour said in an interview with CNN Business Friday following the release of Huntington’s latest quarterly results. Earnings, revenue and net interest income — a key measure of bank profits — all rose from a year ago and topped forecasts.

Steinour conceded that the surge in inflation has been a problem for many consumers, particularly lower income ones. But he said that many of the bank’s middle class and more affluent customers, as well as small businesses, have a financial cushion from stimulus money that they didn’t wind up spending.

Not 2008 all over again

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

Shares of Huntington Bancshares surged 9% on the news Friday and were up again Monday. The stock is now down just 4% this year.

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

“Leveraging up to flip houses? That 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 surges in real estate prices as on the coasts.

“The Midwest doesn’t typically have a lot of housing inflation,” he said. “We may not get the big spikes, but we don’t get the large falls either.” Steinour added that housing shortages and growing populations in many of its markets, including Columbus, have helped keep real estate prices from tumbling dramatically.

Businesses more cautious and inflation not going away yet

That said, there are big risks that Steinour is monitoring.

“There is a lot to be worried about,” he said.

For one, business customers are growing more wary about the economic outlook. “We’re seeing equipment purchases deferred by companies. There is a sense of conservatism creeping in,” he said.

Consumers are a little more nervous, too, even though they keep spending. “On Main Street, there is still optimism even though there is 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 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 to be more challenging than expected. So we’re likely to see higher rates for a longer period of time.”

Steinour said that big rate hikes may not feel great for consumers or small businesses. But he thinks the Fed is doing what is necessary to prevent “stagflation,” a period where both high inflation and weak growth occur simultaneously.

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

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