Count Huntington among the regional lenders facing deposit cost pressure, although the bank’s CFO pointed to fee revenue growth offsetting that.

The Columbus, Ohio-based bank brought in $4 billion in deposits in the second quarter, bringing its deposit total to $223.4 billion. Cost of deposits edged up six basis points, to 1.88%, according to an earnings presentation. 

That increase is “on the high end of peers,” Truist Securities analyst Brian Foran noted. 

Huntington CEO Steve Steinour noted the bank was “intentionally ‘getting ahead’ of funding future loan growth, but at the same time the CFO noted costs could still creep up a bit,” Foran wrote in a Thursday note.

Additional margin pressure led Huntington executives to note during Thursday’s earnings call that the bank’s full-year net interest income expectation would be on the lower end or slightly below its targeted range of 39% to 43%.

Huntington isn’t alone, of course: Six of 10 large regional banks saw deposit costs increase in the second quarter, CFO Zach Wasserman said in an interview. 

He attributed that partly to faster loan growth across the industry: Seven of 10 Huntington peers that Wasserman tracks saw an annualized level of loan growth of about 10%, he said. With deposits needed to fund loans, heightened competition is driving cost pressures. Plus, there’s the potential for interest rate hikes.

“For us, the question is always, well, what’s the marginal return on capital for growth? And we just posted 17.5%,” Wasserman said, referring to the bank’s adjusted return on tangible common equity for the second quarter. 

“We wouldn’t curtail growth just to save a basis point or two on deposit costs,” he said. 

Still, given the strength of loan growth, some investors “are concerned banks will have to pay up for funding, driving higher funding costs that are margin dilutive even if [net interest income] grows,” Truist Securities analyst David Smith wrote in a Friday note. 

Deposit cost competition and the degree to which regional lenders “will have to ‘pay up’ for incremental funding” has been the biggest topic of interest during regionals’ second-quarter calls, said J.P. Morgan Securities analyst Anthony Elian. 

Competition is likely to intensify, and banks with deposit costs lower than their peers and loan growth at parity or above their peers are “most at risk in the near term,” Elian wrote in a July 22 note. In separate notes, he mentioned Memphis, Tennessee-based First Horizon and Salt Lake City-based Zions as two lenders in this camp. 

Wasserman said he expects deposit pricing trends to moderate in the near term, in part because $284 billion-asset Huntington can “optimize” a large base of deposits it gained through the acquisition of Houston-based Cadence, which added about $43.5 billion in deposits. With those, the lender sees an “opportunity to pare back costs” in select places, Wasserman said. 

That includes employing pricing strategies that drive increased deposit balances from existing customers at favorable rates, the bank said. Executives noted during the call, though, that the Cadence deposit optimization will be slightly slower than planned given higher rates.  

The Midwest is Huntington’s most competitive region when it comes to deposit pricing, executives said Thursday. 

Other lenders such as Ohio peer Fifth Third have made similar comments on Midwest competition on recent earnings calls. 

CFO Bryan Preston, on July 17, noted it’s getting more expensive to grow deposits, and the Cincinnati-based bank’s deposit growth is likely to come through higher-rate, interest-bearing accounts in the near term. Fifth Third’s total cost of deposits was 1.54% in the second quarter, down four basis points from the prior quarter.  

Differences in regional pricing are “a little overblown,” amounting to 10 to 15 basis points, Wasserman asserted.

The Southeast is also a fairly competitive region when it comes to pricing, more so than Texas, he said. He chalked that up to about 70% of the deposit market in Texas being held by the largest banks, which typically have lower deposit pricing, and that’s influenced the market more broadly. 

Huntington has 56 rate regions in its regional-based business, and aims to be “extraordinarily granular” with pricing across all of them through various products and customer segments, Wasserman said. The bank is employing artificial intelligence in that endeavor, analyzing customer behaviors and using data analytics to discern pricing, he said.

To offset pressure on net interest income, which is about 74% of the bank’s revenue, Huntington touted strong organic fee revenue in the quarter, which grew about 30% year over year.

That’s due to momentum in payments, wealth and capital markets – areas where the bank’s recent investments are paying off, Wasserman said – which gives the lender confidence in its full-year fee income coming in at the high end of or above a 31% to 33% range. 

Fee revenue, though, carries greater expense. Huntington’s non-interest expense rose 51% year over year, to $1.8 billion, according to an earnings release. That included $27 million in increased personnel costs due to higher incentive and performance-based compensation, Wasserman said during the bank’s call. Capital markets was responsible for most of that, he said.