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Five pivotal questions for banks in 2018
Banking has been flying in a similar pattern for the last few years, but 2018 is shaping up as perhaps a turning point toward a new course — one that has its pluses and minuses.

The anticipated U.S. tax windfall and handful of rate increases from the Federal Reserve should arm banks with new funds to reward employees and shareholders and allow banks to reinvest in their businesses. It could be a nice offset to still sluggish loan growth, especially on the commercial side.

The earnings season that starts next week will give CEOs a forum to provide more clues about how some of these funds might be used. Yes, banks have announced pay increases for the rank and file and some other things, but they may also increase spending on cybersecurity or mobile upgrades or be able to afford to eat some lingering problem assets.

Yet every gain brings with it a potential downside.

Deposit costs, credit quality and cost-control matters remain determinants of how much money banks make this year. Higher interest rates could force banks to do what they have so far avoided: raise what they pay for deposits. The temptation will be great to keep deposits low and try to fatten margins, but competition for deposits could increase, especially from consumer lenders whose business has been stronger and may need the extra deposits to feed more growth.

Speculation is rampant about loan volume and yields, expenses and efficiency ratios, possible branch closures and how much more might be spent on technology initiatives. And the debate will heat up about how much of a concern credit quality trends are — problem assets remain manageable, but delinquencies in auto loans and credit cards have been a concern for months.

The following questions will loom over the banking industry this year.
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Tax windfall: Where will it go?
Median profits could rise 20% in 2018 among the regional banks followed by Evercore Partners, the investment banking advisory firm said. Many banks have announced one-time bonuses for nonexecutives, along with increased minimum wages. Tax savings could also spur more banks to go ahead and record fourth-quarter securities losses and writeoffs on foreclosed properties. Banks could look to use some of the benefits of a lower tax rate to beef up cybersecurity and invest in technology. FIG Partners is forecasting that roughly a third of the savings will go toward salary increases, cyber and mobile updates and increased loan-loss reserves.
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Will growth in yields make up for lagging loan volume?
2017 was the year of tepid loan growth, especially on the commercial side, and 2018 may not start out much better. Loan growth will be a challenge as some borrowers pay off balances and others remain reluctant to take out new loans.

That trend can be offset in a couple of ways.

With the Fed projecting that it will raise rates three times this year, banks could enjoy higher yields on new originations. However, a flatter yield curve and intense competition could work against them. Observers will be looking at how banks position their loan portfolios in terms of durations and yields as rates move up.

Banks could also pursue more acquisitions to gain market share and scale.
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How much will deposit costs rise?
Banks have so far done a good job of keeping deposit pricing low. Still, each rate hike will likely embolden depositors to demand higher payouts. Big banks are already hearing from wealthy clients who want to see higher rates on their funds. More consumer loan growth, like that experienced by credit card lenders such as Capital One, could also pressure some banks to pay more for the liquidity to back their originations.
How limiting will cost-control pressures be?
All banks want to keep expenses and efficiency ratios down. Hopes of regulatory relief make those goals seem more obtainable, but banks cannot get ahead of themselves. While regulatory costs may have peaked, spending on cybersecurity and mobile platforms will likely rise. The increased tech spending might also have to be offset by more branch closings.
Will credit quality get better or worse?
Overall credit quality remained stellar last year. Nonaccrual assets made up just 0.4% of total assets at Sept. 30, representing an improvement from a year earlier, according to data compiled by the Federal Deposit Insurance Corp.

Still, late-payment rates for bank-issued auto loans and credit cards hit their highest levels in more than four years in 2017, raising concerns from industry observers and prompting a number of banks to slow down growth in those areas. At the same time, rising home values seemed to buffer home equity loans and lines of credit.

Issues with commercial loans were largely confined to specific niches such as energy credits and medallion lending. Retail development, which is being threatened by the rise of e-commerce, and agriculture are sure to be on the radar of investors as the new year moves along.