Will the results match the hype?
That's the big question facing publicly traded banks as they prepare to release their fourth-quarter results.
Since the November elections, bank stocks have been on a tear amid expectations that President-elect Donald Trump and a Republican-controlled Congress will quickly move to invigorate the economy by relaxing regulations on businesses and cutting corporate taxes.
But bankers and analysts say commercial loan demand is likely still too tepid to translate into meaningful improvement in profits — at least in the short term. Additionally, the recent rise in interest rates has slowed mortgage activity, potentially further crimping profits, they said.
On the plus side, a rebound in long-term yields could prove to be a boon for banks' securities portfolios.
Here's what to expect from banks' fourth-quarter results.
No Trump bump — yet
Commercial-and-industrial loan growth has slowed substantially in recent quarters and bankers said they weren't expecting to see much improvement in the fourth quarter because borrowers have remained cautious.
"I would say there's increased optimism out there for the future," Ralph Babb, the chairman and CEO of the $74 billion-asset Comerica, said at recent industry conference. But among small and midsize businesses, he added, "the decision has been made to not borrow at this point in time."
Some larger banks are expected to buck the trend. Citizens Financial in Providence, R.I., for instance, reported a 9% increase in commercial loans in the third quarter from the prior year. The $114 billion-asset company will likely continue to grow loans at healthy clip, said Brian Klock, an analyst with Keefe, Bruyette & Woods.
During conference calls with analysts, bank CEOs will likely be pressed for information on borrower confidence — and what that means for commercial loan demand in the coming year.
"It's interesting in its incongruity," said Scott Siefers, an analyst with Sandler O'Neill. "On the one hand, there's hopefulness that we'll have a broader macro recovery, and a more business-friendly environment overall."
But weekly data on lending activity from the Federal Reserve has not yet shown signs of a rebound, Siefers said.
Some businesses "may have put capital to work," Klock said. But, he added, "there still may be some caution."
The post-election spike in mortgage rates will take a bite out of mortgage income.
Average rates on 30-year fixed mortgages jumped to their highest level of the year in late December, hitting 4.32% on Dec. 29, after hovering around 3.5% at the beginning of the fourth quarter, according to Freddie Mac.
The higher rates likely curbed demand for refinancing in the fourth quarter and made the cost of homeownership prohibitive for some buyers. Applications have fallen in recent weeks, and originations are expected decline by 15% in the coming year, to $1.63 trillion in 2017, according to the Mortgage Bankers Association.
Banks such as the $200 billion-asset SunTrust Banks in Atlanta and the $126 billion-asset M&T Bank in Buffalo, both of which have sizable mortgage operations, will likely see a sharpest decline in mortgage-related fees, Klock said.
Though analysts were expecting a seasonal slowdown in the fourth quarter, the end-of-the-year spike in rates has most analysts predicting a larger-than-expected decline in noninterest income.
Investment opportunities improve
Following the election, the yield on the 10-year Treasury jumped as high as 2.6% in late December, after starting the quarter nearly 100 basis points lower.
It was a rapid change in fortune, after yields hit record lows earlier in the year, following the referendum vote by the U.K. to leave the European Union.
The sharp increase gives banks more attractive investment opportunities — and new ways to put excess liquidity to work, analysts said.
"I think most banks, whether they chose to or not, had excess funds with nowhere to put them," Siefers said.
Most banks have kept the average duration of their investment books short, waiting for yields to bounce back. For instance, PNC Financial Services Group has a large amount of cash that it has chosen not to invest, according to Klock.
A key question facing the bank CEOs in the coming weeks is whether they plan to invest more, given the higher yields, or whether they will use the funding for other purposes, such as expanding their loan books.
Continued margin squeeze
It's unlikely that fourth-quarter margins will budge, despite hike in short-term rates by the Federal Reserve Board in December.
Overall, analysts expect net interest margins — a key metric of profitability — will likely compress by an average of 2 basis points across the industry, analysts said.
For some banks, a major factor weighing on margins is the recent increase in the three-month London interbank offered rate, according to Klock. The three-month Libor increased to about 1%, from 0.87% at the beginning of the quarter.
The move increased the borrowing costs that many banks pay on wholesale sources of funding, Klock said.
Analysts expect net interest margins to increase in the coming year, however, if the Federal Reserve continues to increase short-term rates. During the third quarter, the average net interest margin rose to 3.18%, from 3.08% a year earlier, according to the Federal Deposit Insurance Corp.
Questions on deposit prices
Following the Fed's rate hike in December, expect bank CEOs to be peppered with questions about their strategy for increasing deposit prices.
Though JPMorgan Chase, the industry's largest bank by assets, previously signaled that it plans to quickly raise deposit rates, most analysts expect that the industry will keep deposit prices low in the coming year.
Most banks are simply flush with deposits and can afford to relinquish some funding, as they invest in higher-yielding securities.
"I think deposit prices will stay low" in the near term, Siefers said.