Intense competition and lower interest rates could spur more refinancing and result in higher payoff levels for consumer and commercial loans in 2020.
A number of bankers have been warning about decelerating loan growth in areas such as energy and agriculture. Accelerated payoffs will only put more pressure on loan balances and underwriting in coming months.
“Payoffs are elevated and loan growth is challenging,” said Kevin Cummings, chairman and CEO of Investors Bancorp in Short Hills, N.J. “Competition is tough and banks have to be selective to protect credit quality and maintain margins.”
While the $26.7 billion-asset Investors continues to benefit from a strong economy and steady loan demand from growth-minded commercial clients, nonbank competition has heated up, Cummings said. Those lenders are willing to refinance loans at lower rates and longer durations.
Expect more banks, especially those that have lower-than-expected loan growth and high payoff levels, to get pressed by analysts during their fourth-quarter earnings calls.
Pricing by nonbanks tends to fall below what makes financial sense for banks, leading to loan runoffs, industry observers said.
“No question, especially following the drop in rates, [pricing] is going to be an issue for more banks,” said James Bradshaw, an analyst at Bridge City Capital.
Some commercial clients are paying down in anticipation of an inevitable downturn. Others have taken advantage of the ongoing recovery by selling their businesses — and paying off loans as part of the process.
“A lot of banks’ commercial clients are more cost-conscious now than a year or so ago,” Bradshaw said. “Nothing is inevitable, but many of them are more nervous about an eventual shift in the economy than most probably say publicly.”
Business owners also remain concerned about a protracted trade war with China, geopolitical tensions in the Middle East, uncertainty tied to the looming presidential election and, simply, a sense that the cycle is bound to turn, industry observers said.
A Stephens survey of 100 bankers in December found that nearly a fifth expect lending to decelerate due to increased paydowns. Another 22% pointed to borrowers’ macroeconomic and political worries.
On the consumer side, bankers and economists said confidence remains strong and credit is still being used to finance purchases. But with rates low, banks will see elevated levels of refinancing and possibly more competition when homebuying season revs up this spring.
Should the job market remain solid, more consumers could pay down credit card balances and use cash for more purchases, said Scott Brown, chief economist at Raymond James.
“Just like a business, if a person gets to a point where cash levels are fairly high, it can make sense to carry less debt,” Brown said.
More banks are bracing for a cycle shift by tightening underwriting standards in certain sectors, economists said.
A December survey of bankers across the Midwest by Creighton University’s economics department found that two-thirds of participants increased collateral requirements for farm loans last year. Roughly a third had rejected a higher percentage of farm loan applications.
“The China trade issues need to come to a final resolution soon to take this stress off our farmers,” Lonnie Clark, president of the $48 million-asset State Bank of Chandler in Chandler, Minn., said in response to the survey.
