Profit Snapshot: All eyes are on “loan growth, loan growth, loan growth”


Banks have waited a year for loan demand to return, and investors are eager to see if any progress has been made.

A rebound in loan growth is essential to support net interest margins, which fell to historic lows in the second quarter, and to strengthen profitability, which has been sluggish for much of the past two years.

“It’s loan growth, loan growth, loan growth – these are the three themes of earnings,” said Brad Milsaps, analyst at Piper Sandler. “It is essential to start rebuilding the margins. “

Federal Reserve policymakers cut interest rates to near zero shortly after the the coronavirus has become a pandemic in early 2020, and they have committed to maintaining the rates until 2022.

At the same time, as consumers and businesses retreated amid the pandemic and saved money, they hid more money in their bank accounts and postponed their borrowing plans. This left the banks overflowing with deposits but with few loan possibilities in which to deploy them.

The result: In the second quarter, average net interest margins of banks contracted 31 basis points from a year ago to 2.5%, the lowest level on record, according to the Federal Deposit Insurance Corp.

“The big concern is that there just isn’t enough loan growth to mop up that liquidity,” Milsaps said. “It’s hard to see the pressure on margins easing for many banks, but we could see signs of improvement. “

Pandemic pressure

After the successful rollout of vaccination last spring and summer, hopes were high that Americans would spend more of their savings and start borrowing again for travel and major purchases. Businesses would follow suit to meet higher demand, it was thought.

Analysts say there were some positive indicators over the summer, including strong economic growth in the second quarter. Gross domestic product accelerated 6.7% on an annualized basis over the period, even better than the 6.3% increase in the first quarter, according to the US Department of Commerce.

But the delta variant of the virus has fueled a wave of new cases and, before the fall of autumn, consumer confidence had collapsed and banks and their customers were becoming increasingly uncertain. The Conference Board, a private economic research firm, said its consumer confidence index slipped to 109.3 in September from a revised 115.2 in August, marking the lowest reading since February.

Americans “have become more cautious and are likely to cut spending in the future,” said Lynn Franco, senior director of economic indicators at the Conference Board.

Milsaps said the delta variant is making third quarter profits “a bit of a wildcard”.

Banks in markets with growing populations, high vaccination rates and corresponding economic growth may signal an increase in demand for loans, Milsaps said, while those in areas hardest hit by the delta variant may not be. .

Loan growth is particularly critical for community banks, most of which generate most of their income from loan interest. For the second quarter, banks with $ 10 billion in assets or less reported a 0.5% drop in loan balances from the previous quarter, according to FDIC data.

Shan Hanes, chairman and CEO of Heartland Tri-State Bank, with assets of $ 133 million, in Elkhart, Kansas, said the loan application looked promising at the start of the quarter. But, he said, “This new variant is a threat to the mindsets and feelings of people. This affects the demand for loans and growth can be difficult. “

Growth alternatives

Robert Bolton, chairman of Iron Bay Capital, a firm that invests in banks, said that banks that are unable to significantly increase loan balances will be under pressure to strengthen businesses, such as the insurance or wealth management, which generate fee income, hiring bankers who can bring business with them, or merge with other banks.

“Either you start to get that lending momentum or you find the growth elsewhere,” Bolton said. “People are starting to expect banks to hit a milestone in the second half of” 2021.

Jon Winick, CEO of Clark Street Capital banking consultancy, agreed.

“I think we’re going to see more of a wedge between the winners and the laggards on loan growth,” he said. What investors will be watching, he added, is how laggards can make up for the lack of volume.

The United Community Banks, with $ 18.9 billion in assets, in Blairsville, Georgia, have bought out both banks and paying businesses.

Last week he completed the acquisition of the $ 750 million asset Aquesta Financial Holdings in North Carolina, an agreement that helps it establish a retail banking presence in Charlotte – the state’s largest and fastest growing market – and close a significant gap in its footprint. And in July he completed his acquisition of FinTrust Capital Partners, an investment advisor in Greenville, South Carolina. The deal more than doubled United’s assets under management.

Raymond James analyst Michael Rose expects’ robust ‘M&A levels through 2022 as banks seek to offset the effects of’ near zero interest rates, growth opportunities moderate and increased expenses ”caused by technological investments.


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