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PNC Financial Services (PNC), U.S. Bancorp (USB), & Huntington Bancshares Incorporated (HBAN): The Dilemma for Regional Banks

Regional banks have emerged stronger after the financial crisis. However, most regional banks have been facing significant margin pressure as the Federal Reserve has kept interest rates at record low levels. While the low interest rate has helped in boosting lending activity, it has hurt banks’ margins. Although regional banks are hoping for a rise in interest rates, they face a dilemma. A sudden rise in interest rates could hurt lending activity.

Emergence from Financial Crisis

Regional banks were among the hardest hit by the subprime mortgage crisis and subsequent financial crisis. Since then, regional banks have been strengthening their balance sheet. Several regional banks have emerged significantly stronger after the crisis as evidenced by their balance sheet.

PNC Financial Services (NYSE:PNC)

At the end of the first quarter of 2013, PNC Financial Services (NYSE:PNC) had reported a Tier 1 common capital ratio of 9.8%. The bank’s estimated pro-forma Basel III Tier 1 common capital ratio was 7.9% at the end of the first quarter of 2013.

Another major U.S. regional bank, U.S. Bancorp (NYSE:USB) had reported Tier 1 common ratio of 9.1% and a Tier 1 capital ratio of 11% at the end of the first quarter of 2013. The bank’s Tier 1 common ratio under the proposed rules for the Basel III standardized approach was around 8.2% at the end of the quarter.

Huntington Bancshares Incorporated (NASDAQ:HBAN) had reported Tier 1 risk-based capital ratio at the end of the March quarter of 10.62%. The bank’s Tier 1 risk-based capital ratio at the end of the March quarter stood at 12.16%.

Net Interest Margin a Worry for Regional Banks

The data above highlights the fact that regional banks have made a strong recovery post the financial crisis and are ready to meet with stringent Basel III capital requirements. However, the worry for U.S. regional banks at the moment is net interest margins.

Banks’ net interest margins have come under pressure as the Federal Reserve has kept interest rates at record low levels for four years now. Last year, mortgage rates fell to record low levels due to the Fed’s ultra-loose monetary policy measures, which include an aggressive bond buying program apart from record low interest rates.

The margin pressure has hurt regional banks’ net interest income. In the first quarter of PNC Financial Services (NYSE:PNC) had reported net interest margin of 3.81%, down from 3.85% reported in the previous quarter. The bank’s net interest income fell by $35 million on a sequential basis.

U.S. Bancorp (NYSE:USB)’s net interest margin for the first quarter of 2013 was 3.48%, down from 3.55% reported in the fourth quarter of 2012 and 3.60% reported in the first quarter of 2012.

Low Interest Rate Environment Boosts Lending Activity

While the Fed’s ultra-loose monetary policy measures are hurting banks’ margins, they have boosted lending activity, especially commercial and industrial segments. In the first quarter, PNC Financial Services (NYSE:PNC) reported a 1% sequential increase in total commercial lending. U.S. Bancorp (NYSE:USB), meanwhile, had reported a 14.3% on a year-over-year basis in average total commercial loans. The bank’s average total loans grew 5.8% on a year-over-year basis in the first quarter of 2013.

Although lending activity has been picking up, the positive impact is being offset by downward pressure on net interest margin. At the time of the release of first-quarter results in April, Huntington Bancshares Incorporated (NASDAQ:HBAN) had noted it expects net interest income to modestly grow over the course of 2013.

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