Loan growth will be an afterthought this earnings season

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Many things are outside the control of community banks, including lower interest rates, increased competition and diminishing loan demand.

So it makes sense that bankers will field more questions about areas they can manage, such as capital management and cost control, this earnings season. Updates on credit quality and the impact of a new accounting standard for future loan losses should also be expected.

Banks will also be challenged to provide as much visibility as possible for the first quarter and beyond. Those that can keep a tight grip on expenses and avoid any credit hiccups are likely to stand out, industry observers said.

“We believe the ability to control the controllable will be of even greater importance” to investors, said Christopher McGratty, an analyst at Keefe, Bruyette & Woods. That means “a firm commitment to profitable and efficient capital management and maximizing operational efficiency,” he said.

Lending volumes and net interest margins could remain under pressure in 2020, KBW’s research team said in a recent note to clients. They expect earnings per share, on average, to decline from last year’s levels.

Bankers, by and large, agree.

Compressing net interest margins and decelerating loan growth “have a ripple effect” on banks, said Chris Nichols, chief strategy officer at the $17 billion-asset CenterState Bank in Winter Haven, Fla. “You have to slow spending to respond, so I think the bulk of new efforts are going to be around expense control.”

Commentary on capital management, including dividends, share repurchases and acquisitions, will also be closely monitored.

M&A is top of mind for an increasing number of bankers, the research team at Stephens said in a recent client note.

A Stephens survey of 100 bankers conducted between mid-November and mid-December found that nearly three-fourths of respondents expected consolidation to accelerate in 2020, an increase from 54% a year earlier. And 80% expect margins to narrow, while more than half are bracing for a year-over-year decline in net interest income.

While credit quality remains strong, a fifth of the surveyed bankers said they are seeing early signs of deterioration.

Cadence Bancorp in Houston, for instance, endured a spike in charge-offs during the second and third quarters.

Though he characterized Cadence’s problems as isolated incidents, Paul Murphy Jr., the $18 billion-asset company’s chairman and CEO, said investors will have little tolerance for more credit issues in 2020 — and scrutiny will intensify.

“We’re not in the business to make bad loans, but there is risk in any portfolio,” Murphy said.

Investors are also interested in the impact of the Current Expected Credit Loss accounting standard, or CECL, which publicly traded banks adopted on Jan. 1. The new standard, which requires banks to create reserves for loans when they are originated, will likely cut into 2020 profits at many banks.

Four out of five bankers surveyed by Stephens were preparing for higher loan-loss provisions in 2020 tied to CECL. Still, respondents were hopeful that the impact will prove limited; half projected that provisions will rise by 1% to 10%, and more than a quarter forecast an 11% to 20% increase.

Though CECL implementation will be “a headache for bankers” and an “EPS headwind” this year, the Stephens team said it believes the ongoing financial impact will be “manageable” for most banks.

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