The banking industry appears has regained some momentum as optimism about commercial lending and other sectors strengthens, according to a survey of bank executives.
The American Banker Index of Banking Activity rose to 56.6 in December, noticeably higher than the 54.9 reading in November. It was the first time the index has increased in consecutive months since March, when the 18-month-old index peaked at 60.1.
December's reading, the latest available, was relatively flat compared with a year earlier.
Bankers' views of market conditions improved, registering a 55.5 reading, compared to 53.2 in November. The reading for real estate conditions edged up slightly from a month earlier, to 53.3.
"We really believe we're at a positive, pivotal point in the economy," Kelly King, chairman and chief executive of BB&T (BBT), said during the Winston-Salem, N.C., company's quarterly call with analysts last month. "I'm not going to says it's perfect, and I'm not trying to say we've had a 180-degree turn. I just simply think we've made a turn, and that's a big deal."
Index readings above 50 indicate a monthly expansion of activity, and readings below 50 point to contraction. For contrary indicators, such as the components that track loan delinquencies and loan-rejection rates, a reading above 50 is considered evidence of deterioration in business activity. The further from 50 a reading is, the stronger the indicated change.
Commercial lending activity accelerated for the second straight month, though a number of bankers have cautioned that a large part of their business has involved refinancings. The reading for applications was 57.5, and approvals increased at a faster rate, 60.8. The reading for commercial loan approvals was the highest since May.
"Within the C&I market, borrower and financial conditions have improved," Gerald Lipkin, chairman and CEO of Valley National Bancorp (VLY) in Wayne, N.J., said during his company's quarterly conference call.
"Profitability and liquidity continue to expand for many of our customers," Lipkin added. "However, many appear unwilling to take the risks necessary to expand their business. That being said, we are guardedly optimistic about the opportunities prevalent in the commercial lending space."
Momentum was nominal on the consumer side. Applications posted a 50.1 reading, showing a minor increase, while the reading for approvals stood at 52.5. Last year's spike in long-term interest rates continues to put a damper on the once-vibrant mortgage refinance, cutting into fee revenue for banks that aggressively sold originations in the secondary market.
Bankers as a result are becoming more competitive in funding new home purchases.
"We are focused on increasing our market share of purchase activity," Kevin Riley, chief financial officer of First Interstate BancSystem (FIBK ) in Billings, Mont., said during a conference call. He noted that the company's mortgage volume increased 20% in the fourth quarter compared to a year earlier.
Overall loan pricing remained relatively stable and beneficial for banks in December. In some instances, pricing is a function of geography, product and competition, according to bankers' statements during last month's quarterly conference calls.
"We're encouraged that loan pricing on new production improved, albeit very modestly, compared to the prior quarter," Harris Simmons, chairman and CEO of Zions Bancorp. (ZION) in Salt Lake City, told analysts.
In parts of the Northeast, there was concern that pricing could work against banks in the new year. "In the wake of the 10-year [rate] being relatively flat, we saw banks lowering their five-year multifamily rate," said Kevin Cummings, president and CEO of Investors Bancorp (ISBC) in Short Hills, N.J.
"What we were told was that other banks in the market were getting ready or were lowering their rates in order to get their pipelines in order for the first quarter," Cummings added. "Even we have lowered our rate on multifamily loans to 3.25%, and it seems like we're at the higher end of the range."
Deposit pricing remained in bankers' favor, which has been the case ever since the IBA debuted in June 2012. Net interest margins, as a result, have remained relatively stable in recent months.
Banks continued to hire in December, though it was at a slower pace than the three previous months. Still, at 50.2, the reading for staffing showed ongoing momentum heading into 2014.
The IBA is a product of American Banker's monthly surveys of bank executives. The diffusion index is published in partnership with VantageScore Solutions. The latest installment was based on 247 responses.
The IBA's composite index is a simple average of readings on a range of indicators based on responses to survey questions on topics that include volume and pricing trends in commercial and consumer lending, loan balances outstanding and deposit-account activity.
Respondents are also asked to weigh in on staffing levels at their institutions, as well as business and real estate conditions in markets where they do business. Every effort is made to ensure that the breakdown of companies included in the executive panel is representative of the industry.
The values for individual components of the index are equal to the percentage of responses indicating increased activity plus one-half of those indicating "no change." Component scores are then averaged to arrive at a composite. When calculating the composite, contrary indicators such as delinquencies are scored inversely the component figure is subtracted from 100.