Perhaps the greatest challenge banks face these days is somehow balancing the desire to grow with the very real need to reduce overhead.

Even with the economy showing signs of life lately, bankers remain exceedingly cautious about investing in new business lines, products or markets if it will result in higher expenses and poorer efficiency ratios.

That caution was evident during the earnings calls of three regional banks Thursday. PNC Financial Services Group (PNC), Huntington Bancshares (HBAN) and BB&T (BBT) all beat earnings projections in the fourth quarter and seem poised to grow in 2014, but their chief executives did their best to manage investors' expectations.

PNC's Bill Demchak, for example, warned of tepideconomic growth in 2014 that could potentially tamp down both interest and noninterest income — and force more cost cuts.

BB&T executives were more bullish on the economy but still predicted flat revenue growth for the year. Meanwhile, Huntington's Stephen Steinour predicted that Huntington's revenue would increase in 2014 — it fell 7% in the fourth quarter — but said he is prepared to further reduce expenses if revenue growth falls short of expectations.

All their comments showed the pressure on bank executives who know investors are tired of waiting for things to get better more than five years after the financial crisis, yet lack the certainty — or the control of events — to assure them real growth is around the corner.


From the beginning of their conference call, PNC officials seemed to be prepping analysts for a possible letdown in 2014.

Top executives briefly celebrated their accomplishments of 2013 before painstakingly warning about the persistent macroeconomic challenges to the $320 billion-asset company's growth, the dwindling of M&A-related accounting and other special items that have provided some cushion recently and the need to keep cutting costs this year.

"Now, without question, 2013 was a good year for us," Demchak said, detailing the drivers behind its 40% increase in full-year profits, which included a 22% rise in fee income and an 8% pickup in commercial lending year over year.

PNC considerably improved its efficiency ratio — a measure of how much spending it takes for each $1 of revenue — to 61% last year from 68% a year earlier.

"But, in the end, our expenses are higher than they should be and we are focused on doing something about it," Demchak said bluntly.

The Pittsburgh company cut expenses 7% year over year, and exceeded its 2013 cost-cutting goal of $700 million by $75 million. It plans to cut another $500 million in 2014, Chief Financial Officer Rob Reilly said.

The PNC execs could hardly have been clearer about why they need to make the cuts.

A chart summarizing their first-quarter outlook predicts loan growth will be "modest," that net interest income will be "down modestly" and that fee income will fall.

The executives raised concerns about economic growth and warned that revenue could decline after having risen last year.

"We believe that the U.S. economy will expand at a muted pace and that short-term interest rates will remain low," Reilly said. "With that in mind, we expect full-year revenues to continue to be under some pressure and as a result could likely be down year-over-year revenues."

The new round of cost cuts will fund its "significant investments" in technology and other infrastructure at the retail bank, Reilly said.

Such investments, and the rising popularity of mobile banking, seem to be having an impact. Deposits at ATMs and through smartphones were 30% of total deposit transactions in the fourth quarter, twice that of a year earlier, Demchak said.

"Our challenge in 2014 remains the same" as in 2013, Demchak summed up. "We will need to outpace the ongoing decline in purchase-accounting accretion and the impact of low rates and heightened competition through organic growth of clients and tight expense control."


Huntington hit its goal of achieving positive operating leverage in 2013, and Chairman and CEO Stephen Steinour said Thursday that the $59 billion-asset company would do so again in 2014.

But unlike last year, when expense cuts drove the effort, Huntington will hit its target by growing top-line revenue, Steinour said in a conference call with analysts. Huntington has established, or beefed up investment in, several business lines over the past year — namely equipment leasing, health care lending, trade finance and agricultural lending — and Steinour said revenue should continue to grow "as our investments continue to mature."

Already, the investments are paying off. Even with its credit line utilization rates at all-time lows, according to Steinour, Huntington saw its commercial and industrial loans increase 7% year over year, to $17.7 billion, largely due to loan growth in its newer business segments.

Moreover, Steinour said business owners in Huntington's six-state region are gaining the confidence to invest in business expansion. He described the commercial loan pipeline as "robust" as the upper Midwest economy — driven lately by the auto and natural gas industries — continues to outperform other markets.

"Right now we are seeing strong momentum as customers seem to have a slightly better mindset," Steinour said. "Troubles in Washington, D.C., seem to be less of an issue, and the general economic outlook and confidence is more positive."

Still, competition for quality business loans remains intense and that, along with other factors, is placing continued pressure on the net interest margin. Huntington's margin fell 9 basis points year over year, to 3.36%.

Improving efficiency has also been a challenge, despite ongoing expense cuts. Huntington cut overhead by 5% year over year, largely by laying off mortgage lenders and shuttering more than 30 free-standing branches, yet its efficiency ratio rose slightly, to 62.9%

Steinour said the company remains committed to lowering the efficiency ratio, especially if it stands in the way of his operating leverage goals. Last year the company moderated some of its investments to keep expenses down and Steinour told analysts he would not hesitate to do the same in 2014.

"Many of you didn't think positive operating leverage was possible at the mid-year mark, but we ran through our playbook and slowed the pace and scale of our investments," he said. "Going into 2014 we've built a similar playbook and, we will, if necessary, adjust."

Its preference, though, is to continue to invest in new products, markets and delivery channels. Huntington has been steadily expanding its reach in auto lending — it most recently entered Iowa and Connecticut — and the result was record year for originations in 2013. It also has shown steady growth in consumer and business accounts, which Huntington has attributed in part to its investment in grocery store branches over the last several years. The bank opened 32 in-store branches in 2013 and is planning another 14 this year.

The bank has also been winning over new customers with its "asterisk-free" checking product it rolled out in 2010 largely in response to the decision by some competitors to discontinue free checking. In the conference call, Steinour hinted that Huntington would consider eliminating or reducing fees on certain products if it feels the moves might give the bank a competitive advantage.

"We're challenging ourselves," he said. "We think there's a contrarian moment here."


BB&T in Winston-Salem, N.C., is also trying to improve its efficiency ratio, promising analysts that the metric would be in the mid-50s by the end of this year. At Dec. 31, the efficiency ratio was 59.9%, slightly better than the company's peak of 60.1% a quarter earlier.

During a conference call, management said it is tricky to project how much the efficiency ratio will improve on a quarterly basis.

"It will come down, but it is not going to be very linear," Daryl Bible, BB&T's chief financial officer, said during the call. "It will probably bounce around a little bit, but the trajectory is downward."

Cutting costs isn't a problem at the $179 billion-asset company. Noninterest expenses fell 2% from a year earlier, to $1.5 billion. BB&T has been able to reduce costs tied to branches, professional expenses and foreclosure activity. Software expense, an investment for the company, rose 13% from a year earlier.

Top-line growth is another story. Revenue at BB&T fell 6% from a year earlier, to $2.3 billion, as the margin compressed and the balance sheet shrank. (Overall, net income rose 6% from a year earlier, to $537 million, though a large reduction in the loan-loss provision played a key role in the results.)

"Essentially revenues will be flattish for 2014 versus 2013," Bible warned. "We have expense projections that should be down probably 3% or so on a year-over-year basis."

Still, Kelly King, BB&T's chairman and CEO, struck a much more positive tone than other banks' executives when assessing the economy, though he admitted his views were "substantially intuitive" rather than quantitative. "We really believe we're at a positive pivotal point in the economy," he said during the call.

"I am meaningfully more positive about where we are going today than say 90 days ago," King added. "I'm not going to says it's perfect, and I'm not trying to say we've had a 180-degree turn. I just simply think we've made a turn, and that's a big deal."

Still, the company's balance sheet contracted in the fourth quarter. Total loans fell 1% from the third quarter and were down slightly from a year earlier. Deposits levels also decreased. The margin contracted by 28 basis points from a year earlier, to 3.56%.

BB&T's margins should stabilize later this year, though Bible told analysts to expect further contraction during the first quarter.

BB&T has several initiatives under way to try and kick-start lending, King said. The company formed a food and agriculture specialty group, and it has opened corporate lending offices in California, Ohio, Chicago and New York.

"We're gaining a lot of momentum in all of those areas," he said.

Alan Kline is an editor for American Banker, Dean Anason is leader of the Mergers & Acquisitions community page on, and Paul Davis is the Community Banking editor for American Banker.

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