For Banks, Good Blend Makes for Potent Brew

Regional bank U.S. Bancorp, whose loans are moldering like last week’s leftovers, on Wednesday reported third-quarter earnings of $603 million and growing revenue. Regional bank Keycorp, whose loans are moldering like last week’s leftovers, on Wednesday reported third-quarter losses of $422 million and shrinking revenue.

What gives? And come to think of it, why did midsize Colonial BancGroup fail this summer, while midsize Hudson City Bancorp is churning out profits and dividends? Clearly, some banks are riding out the financial storm, while others are twisting in the wind. Understanding why offers a way to distinguish banks that are likely to survive, and even thrive, once the financial crisis abates, from those with bleaker prospects.

The key is a bank’s mix of business. All banking companies across the industry continue to suffer from souring loans. That will continue for some time to come (Yes, I’m fudging the time frame — no one knows for sure when the bleeding will stop.) But even as that trend continues, some players are drawing enough revenue from other lines of business to offset rising loan losses. Others, not so much.

U.S. Bancorp has added roughly $33 billion in deposits in the last year (including acquisitions), driving interest income and margins. The company also is compensating for its problem loans by actually picking up lending, particularly in credit cards, home equity lines and student loans, with 9.3 percent year-over-year growth in outstanding loan balances. Other bright spots at the company include treasury managment and mortgage production. That adds up to profits — U.S. Bancorp recorded an impressive 10 percent return on equity for the quarter.

Contrast those results with the situation at KeyCorp. The company is adding deposits, but not that much. Certainly not quickly enough to make up for deteriorating loans and declines in other parts of its business.

KeyCorp’s nonperforming loans in the third quarter rose to $2.2 billion, more than doubling from a year ago. Worse, a large chunk of these loans are tied to the wilting commercial sector. Total chargeoffs on commercial loans soared in the period compared with a year ago. As a result of such declines, KeyCorp is having to significantly raise its reserves for loan losses, denting the bottom line. Meanwhile, the company’s lack of scale in other businesses makes it tough to climb out of the hole.

A diverse blend of revenues also helps explain the recent success of some of the big banks, which like their smaller brethren continue to see high loan losses. Wells Fargo yesterday reported third-quarter net income of $3.2 billion, up 98 percent from last year. Powering that increase were strong results in asset management, consumer finance, auto lending, debit cards, retirement services and other business lines.

Yes, many of Wells’s loans continue to fester. The difference is that profits elsewhere are growing faster. Companies with strong investment banking franchises, such as JPMorgan Chase, are are also reaping the rewards of diversity.

It’s pretty simple. For banks, survival these days means stanching loan-related losses, while finding other avenues to growth.