Regional banks, including SunTrust Banks Inc and PNC Financial Services Group Inc , reported improved quarterly results and said credit losses and funding costs are dropping, triggering hopes that banks are stabilizing after years of pain.

Shares of SunTrust, PNC, KeyCorp , Fifth Third Bancorp and Huntington Bancshares Inc rose strongly after reporting results.

BB&T Corp shares were lower after the bank came in with higher profit but fell short of earnings forecasts.

Regional banks are setting aside less money to cover bad loans, and some are seeing loan losses ebb. Meanwhile, their funding costs are dropping as depositors grow willing to accept lower rates on their money.

Fifth Third reported its lowest level of loan losses since the second quarter of 2008; losses fell to $434 million from $626 million in the year-earlier quarter.

Margins will remain pressured, but as sure as there is rain in October, we will see an improving environment for lending too, sometime in late 2010 or 2011, said Gary Townsend, chief executive of Hill-Townsend Capital.

Banks still face real headwinds. Credit costs remain high and loan demand is broadly weak. Even if costs are declining somewhat, it is not clear where future revenue growth will come from.

At the beginning of the year we thought that by now we would be seeing a pickup in loan demand as the economy began to expand, said Stephen Steinour, CEO of Huntington, which posted a second-quarter profit, reversing a year-earlier loss.

While there have been some signs of economic expansion, meaningful loan growth has not yet materialized, Steinour said.


Pittsburgh-based PNC's net interest margin, a measure of the profit it wrings out of money it borrows from depositors, increased to 4.35 percent from 4.24 percent in the first quarter and 3.6 percent a year earlier. The bank cited lower deposit costs as a reason for rising margins.

Atlanta-based SunTrust reported a smaller-than-expected loss as net interest income increased 8 percent to $1.2 billion. Its margin increased from a year prior.

Driven by lower deposit costs, SunTrust's net interest margin exceeded both its previously announced guidance and analysts' expectations.

Not every bank experienced higher margins. Columbus, Ohio-based Huntington said its net interest margin shrank by 0.01 percent.

And Fifth Third reported a decline in both margin and net interest income -- 0.06 percent and 2 percent, respectively.

On the credit side, loan losses fell at some banks, but some lenders boosted profit by setting aside less money to cover bad loans.

PNC put aside $823 million against loan losses in the second quarter, down from $1.1 billion in the same quarter last year.

Its loan losses jumped to $840 million in the second quarter from $691 million in the first quarter and $795 million a year earlier.

BB&T said its nonperforming assets -- or loans the bank believes will not be repaid -- dropped 3.1 percent during the second quarter, its first decline since the first quarter 2006.

The bank's provision for credit losses fell 7.3 percent over the same quarter a year prior.

While the improving margin helped narrow losses and boost profits among the regional banks, long-term growth worries still loom.

SunTrust said borrowers are hesitant to seek credit in the current economy. Its average loan balances declined 9 percent year-over-year,

BB&T bucked the trend, saying new loan originations were up 13.6 percent over the first quarter, to $15.4 billion.

PNC, Fifth Third and KeyCorp all reported better-than-expected profits.

(Reporting by Joe Rauch, additional reporting by Elinor Comlay in New York; editing by John Wallace)