The second half of the year could be a bumpier ride for bank earnings.
Low energy prices, market volatility and slowing loan growth are among the factors likely to weigh down profits for the rest of the year, several bankers said Wednesday at the Barclays Global Financial Services Conference in New York.
Most said they could make it through the danger without too much difficulty. But there were also unmistakable efforts by a few executives to temper analysts' and investors' outlooks.
John Gerspach, the chief financial officer of Citigroup, said turmoil in some emerging markets would hurt its third-quarter results but that the bank had bulwarks in place to prevent wider troubles.
"From a risk point of view, we feel that we can very carefully, very clearly, very consistently navigate that environment, simply because of the quality of our client base and the nature of our activities," he said. "But obviously, to the extent that we're in a lower growth environment, that is going to have an impact on the top line."
Banks are under pressure to keep costs down, and with margins tight, executives at BB&T and Wells Fargo seemed to be managing expectations for their third-quarter results due out in about a month.
Wells' CFO John Shrewsberry expects the San Francisco bank to operate at the high end of its targeted efficiency ratio of 55% to 59% in 2015. "For the next couple of years we will continue to make investments in risk, compliance, cybersecurity and technology that will keep us in the higher range," Shrewsberry said.
BB&T Chief Executive Kelly King predicted expenses at the Winston-Salem, N.C., company will rise in the third quarter, and he echoed the rationale offered by Shrewsberry.
"Today so many costs are going up that we can't control," King said.
It could take awhile for them to settle down. King expects BB&T's efficiency ratio, now at 58% to 60%, to improve to 56% or 57% by the fourth quarter of 2016.
Cost concerns whet the appetite for revenue growth that much more, but it was hard to come by before, and recent global economic jitters could curb revenue potential even more.
Citi, for example, expects low- to mid-single-digit revenue growth for the full year, Gerspach said.
Revenue from fixed-income and equity markets should decline about 5% in the third quarter compared to a year ago, partly because of market volatility, he said.
The bank also faces headwinds in its consumer businesses in North America, where weak card revenue is hampering growth, and abroad, particularly in Asia. But Gerspach said Citi's focus on relatively affluent customers in emerging markets should help limit any damage and that potential losses are not likely to do major harm.
Citi also plans to book higher loan-loss reserves in the third quarter, due to weakness in emerging markets — particularly Brazil and China — and in the energy sector.
Gerspach downplayed the credit challenges, though.
"We don't expect to see any increase in our net credit losses," he said. "This is really just good sound credit management, where you want to take your provisions early and then work your way through the issues."
Persistent Energy Risks
Other bankers also confronted the lingering questions about energy woes.
Wells has targeted the sector for a potential downturn, Shrewsberry said. It has created a "heat map" to track possible fallout in all metropolitan statistical areas with greater than 5% employment in energy-related businesses , he said. Texas, the Dakotas, Pennsylvania and Colorado could encounter some problems in housing and retail sales, he warned.
"The next shoe we should all be looking for to drop … is in energy," Shrewsberry said.
Comerica CEO Ralph Babb sought to allay fears about credit quality and to minimize concerns about the Dallas bank's exposure to the energy sector. The bank has added to its loss provision for the last three quarters, he said. Babb expects credit to further worsen, but he said he does not expect any energy-related losses yet.
"If the recent drop in oil prices to the $40 range per barrel is sustained, it will undoubtedly increase the stress on the energy sector and the whole [Texas] economy," Babb said. "However, our relationship-banking strategy is built to withstand economic cycles."
[Global crude oil prices jumped 5.7% Wednesday to $47.15 a barrel on the New York Mercantile Exchange.]
Loan demand in energy is down as expected, but Comerica also has seen lending slow in other key commercial sectors in the third quarter. Middle-market and corporate lending were on pace for declines through the end of August, Babb said. For Comerica's whole loan portfolio, credit-line utilization dropped to 50% at Aug. 31 from 51% at June 30.
Caution on Lending
King was more upbeat about BB&T's loan outlook but nevertheless warned that lenders are increasingly tempted to overreach in the interest of growth.
He forecast loan growth of 6% to 8% going forward for BB&T. Growth above that level is too risky, he said.
"To be honest in this environment, I don't know that I want to push it higher than [8%]," King said. "If you dramatically change your loan growth in this environment, I'd say you're probably taking on too much risk. The market is growing at about 2%. ... I want more loan growth, too, as long as it makes sense."
The $210 billion-asset company's direct consumer retail lending was up 12.6% year over year at June 30, and commercial and industrial lending was up 10.6%. But BB&T is consciously running down its mortgage lending business and cutting back on commercial real estate construction and development loans "because we don't get the returns that justifies the risk," King said.
BB&T recently bought the $19 billion-asset Susquehanna Bancshares in Lititz, Pa., and has a deal pending to buy National Penn Bancshares in Allentown, Pa. BB&T expects loan balances of $135 billion at the end of the third quarter, King said.
"The only way to really think about increasing profitability is to substantially grow your loan space or combine a reasonable amount of organic growth with M&A growth," King said.
King said he is particularly concerned about multifamily lending — an area that analysts have been predicting for the last two years is on the verge of a bubble.
"We don't have a bubble yet, but we have an impending bubble," King said. "We're on the cusp of a slowdown."
He also sounded a warning about leveraged lending.
"Across the country there has been too much risk taking," he said. "We've been spending a lot of time recapitalizing businesses through leveraged buyouts, and that's not healthy long term."