All the evidence is there that loan demand is poised to strengthen gradually. But banks and their investors are hungry for far more.
Six years after the meltdown, what they crave are blow-out, record-setting periods of loan growth, preferably at double-digit percentage rates.
That was clear at Morgan Stanley's Financials Conference in New York on Tuesday, when Betsy Graseck, one of the firm's banking analysts, asked the audience members what would cause them to increase their holdings of Wells Fargo (WFC). The winner of her multiple-choice question? Accelerated loan growth, which beat out such shareholder-friendly responses as increased dividends or stock buybacks.
Later, Graseck asked the crowd of investors what would drive Regions Financial's (RF) stock price this year. Same answer: loan growth.
"We have a theme from the conference," Graseck exclaimed. "Everyone wants loan growth!"
Whether that kind of growth is going to happen soon is anyone's guess. But banks seem desperate to deliver. Richard Davis, the chairman and chief executive at U.S. Bancorp (USB) in Minneapolis, said strong commercial demand could be the start of an turnaround that will result in loan growth of 9% to 10% a year, up from the company's current average of roughly 6%.
"That's what we had before. That won't be that hard," Davis said. Commercial and industrial borrowers are a "bellwether for informed opinion" on the economy, and they have been investing in their own businesses, he said.
Annual growth of 9% to 10% "isn't unreasonable when the world is back to some form of normalcy," Davis said, though he was unspecific about when he thought that would be.
Davis' optimism has some merit. The $371 billion-asset company reported 1.3% loan growth in the first quarter, compared with the previous quarter, and 6% growth year over year. Wholesale banking and commercial real estate loans led the charge.
More broadly, the Federal Reserve's latest Beige Book economic survey said lending activity rose across the country, with two-thirds of Fed districts reporting rising demand. In a promising sign for community banks, construction-and-development loans, which had declined every quarter since the middle of 2008 before last year, have now grown each of the past four quarters, according to the Federal Deposit Insurance Corp.'s latest Quarterly Banking Profile.
Yet some are not convinced that the good times are here to stay. Less than a quarter of respondents in an informal American Banker poll believe the loan growth in the first quarter will have legs. Nearly 80% of the poll's responses said the momentum won't continue, or they're uncertain if it will.
Some bankers at the Morgan Stanley conference were more cautious than U.S. Bancorp's Davis; they suggested the loan growth will continue, albeit at a somewhat sluggish pace. The persistence of low interest rates continues to put a brake on overall growth.
"It's a tough time for us, because our model still does best in a high-interest-rate environment," said Christopher Carey, the chief financial officer at City National. "I don't know what normal will be anymore, but I think it will be a great story as rates move up."
Karen Parkhill, the CFO at Comerica (CMA) in Dallas, said that, with roughly 85% of the bank's book made up of floating-rate loans, a rise could help the bank hit its target of a 60% efficiency ratio, down from 67.38%.
"We're moving the ratio in the right direction by controlling what can be controlled," she said, but an "increase in rates will be necessary to help us ultimately achieve our goal."
A rise in rates would make deposits more valuable as a source of funding but also more expensive. Parkhill touted Comerica's strong deposit growth in Texas, where deposits have grown 31%, to $10.2 billion, since 2011, but predicts that would be hard to sustain as rates rise.
Banks keep preparing for the turnaround, despite some of the nagging doubts.
The need for deposits to fund future loan growth has made U.S. Bancorp reluctant to shutter branches. The company this year agreed to buy RBS Citizens' Chicago branches and may do more branch acquisitions, Davis said.
"That core money may not be very valuable today or even the last five years, [but] to take a long view, it may well be the most important thing you'll ever have when rates move up," Davis said.
Regions has projected loan growth this year of between 3% and 5%. But the $118 billion-asset Birmingham, Ala., company believes reluctance by small businesses to borrow is holding back those figures from getting any stronger.
"Where we really want to see more demand is the small-business, lower end of the middle market, which is just not demanding credit like we would like," said David Turner, chief financial officer.
"If we can get that group to start demanding credit, using all our products and services, we've got a very different answer for you, in terms of 3 to 5%," Turner said.
In the short run, bankers made it clear they will stick to their recent formula of taking steps to cover their revenue gaps while preparing for their visions of a rosier future. That formula has included cutting costs, rolling out niche, fee-based products and buying branches to load up on deposits.
KeyCorp (KEY), in Cleveland, plans to close 18 branches in the second quarter and reduce its overall real estate by 17% by 2017, said Don Kimble, chief financial officer.
Others discussed expansion plans.
Huntington Bancshares (HBAN), in Columbus, Ohio, may look to securitize some of its auto loans as early as 2014, said Mac McCullough, chief financial officer.
Huntington bought branches recently in Michigan to serve as a complement to some areas where it only had an in-store branch at a grocery store, McCullough said. Further, Huntington still sees some value in branches, he said.
"We still think that branch banking is a good business in terms of customer acquisition and being able to offer advice and the types of products that the customers like to get advice on in person," he said.
Davis seeks to boost U.S. Bancorp's corporate trusts and payments businesses, which he also wants to expand in the European and Latin American markets. He expects payments to eventually account for 35% of the company's total revenue, from 28% currently.
Executives are also dealing with regulatory products that sometimes complicate attempts at innovation.
Regions plans to develop new products to replace the deposit-advance loan product that it was forced to discontinue, Turner said. Regions ended its deposit-advance loans on regulators' crackdown on products that resemble payday loans.