This Midwest bank is far better than the Wall Street giant | Techy Kings

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New York
CNN Business

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

But banking giants such as JPMorgan Chase, Citigroup and Bank of America have been hit hard this year as volatility on Wall Street from the Federal Reserve’s massive anti-inflation rate hike has curbed their merchant and investment banking businesses. Recession worries didn’t help either.

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

The regional bank, which relies primarily on its bread-and-butter business of lending and taking deposits as opposed to Wall Street-style investment banking, outperformed financial giants JPMorgan Chase ( JPM ), Citi ( C ), BofA ( BAC ), Goldman Sachs ( GS), Morgan Stanley (MS) and others.

The KBW Regional Bank Index (KRX), which includes smaller lenders such as Texas Capital Bancshares (TCBI), First Hawaiian (FHB) and Syracuse, NY-based Community Bank System (CBU), is down just 6% this year. That compares with a nearly 20% decline 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 raise interest rates further? Bigger rate hikes are likely to lead to bigger jumps in mortgage rates, which could hurt the slowing housing market.

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

“Consumers are generally still in good shape,” Steinour said in an interview with CNN Business Friday following the announcement of Huntington’s latest quarterly results. Revenue, revenue and net interest income — a key measure of bank profitability — all rose from a year ago and beat forecasts.

Steinour acknowledged that the surge in inflation has been a problem for many consumers, especially those on low incomes. 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 the stimulus money they didn’t spend on spending.

“There is still a lot of excess savings above the norm,” Steinour said, adding that this has led to an increase in deposits for regional banks. To that end, Huntington reported that total bank deposits in the third quarter increased by $1 billion from the second quarter and nearly $4 billion from the same period last year.

Shares of Huntington Bancshares (HBAN) jumped 9% on Friday’s news and rebounded on Monday. Shares are now down just 4% this year.

Steinour said he was pleased that his bank’s clients appeared to have learned from the build-up to the Great Recession and the eventual bursting of the subprime mortgage-induced housing bubble in 2008.

“Taking advantage of flipping houses? That ended in 2008 and 2009,” he said. “Consumers are now less speculative.”

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

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

However, there are significant risks that Steinour is monitoring.

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

For one, business customers are increasingly cautious about the economic outlook. “We see the purchase of equipment being delayed by the company. There is a sense of conservatism creeping in,” he said.

Consumers are also a little more nervous, even as they continue to shop. “On Main Street, there is still confidence although not as much as last year,” said Steinour.

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” may be elusive in the central bank’s fight against inflation.

“A soft landing in my mind is always more like a moderate recession with a quick recovery,” he said. But inflation proved more challenging than expected. So we may see higher rates for a longer period of time.”

Steinour said that large rate hikes may not be appropriate for consumers or small businesses. But he thinks the Fed is doing what it needs to do to prevent “stagflation,” a period in which both high inflation and weak growth occur simultaneously.

“We don’t want another 1970s where there were many years of stagflation,” he said. “We have to bear the pain of rate hikes now and continue so that the economy can rebuild and recover.”

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