More questions than answers in banks' 1Q results

Why has commercial lending slowed and what’s the full-year outlook?

There’s an easy answer to this question, according to many bankers — gridlock in Washington. Many bankers rejoiced after Trump’s surprise victory, with hope that an Obamacare repeal, tax cuts and regulatory relief would launch a golden era of loan demand. But little has changed in Washington, and bankers say that is a major reason why commercial-and-industrial loan growth at many large, regional and community banks was nonexistent in the first quarter. It's a result of the “uncertainty that persists for corporate America and the banking industry in particular, in light of the ongoing political wrangling,” said Chris Oddleifson, the CEO at Independent Bank Corp. in Rockland, Mass.
Still, many banks say commercial pipelines are full, and CEOs such as Citizens Financial Group’s Bruce Van Saun and U.S. Bancorp's Andy Cecere, pictured above, are cautiously optimistic that C&I demand will pick up in the second half of the year. "Our large corporate customers tell us that they're optimistic about the future but are awaiting more clarity regarding potential changes in tax and regulatory reform, infrastructure spend, and trade policies," Cecere said during a conference call.

How long can banks hold the line on raising rates on deposit accounts?

The Federal Reserve’s rate hikes have allowed banks to raise loan rates, but so far most have resisted increasing rates on their deposits. The result, so far, is that banks are generating more meaningful profits from spread income than they have in years and their hope is to keep the momentum going by keeping deposit prices low for as long as they can. Several executives said on earnings calls that their banks are unlikely to substantially raise rates until later this year or early next year. "At this point we have not experienced significant pressure to raise deposit rates," said Lynn Harton, the chief operating officer at United Community Banks in Blairsville, Ga.

How worried should banks be about the shakeout in the retail sector?

Dozens of retailers are either going out of business or shuttering scores of stores, putting investors on edge about banks’ exposure to retail real estate. Many banks don’t break out retail as a line item; those that do insist that their underwriting is sufficiently stringent and that the damage from widespread store closures will be minimal. Smaller lenders, which generally have higher commercial real estate concentration than their larger counterparts, say investors have little to fear because they lend primarily to local retailers rather than large, national chains. “We have very, very few big-box loans on our books, almost none,” said H.E. Timanus Jr, vice chairman at Prosperity Bancshares in Houston. Renasant in Tupelo, Miss., is keeping an eye on things, “but [we] don’t anticipate any problems or see any exposure or concentrations,” said CFO Kevin Chapman.

Where are some other trouble spots in CRE and business lending?

More and more loans to hospitals and other health care providers seem to be souring, though banks offered few clues as to why. Several news outlets have reported, though, that many states’ refusal to expand Medicaid following the passage of the Affordable Care Act has left many hospitals struggling to pay the bills. LegacyTexas Financial in Plano, PacWest Bancorp in Los Angeles and Triumph Bancorp in Dallas all reported problem loans tied to bankruptcies in the health care sector. And Opus Bank in Irvine, Calif., which just launched a health care lending unit in 2013, now plans to exit the sector entirely after running into credit issues last year. Aaron Graft, Triumph’s CEO, blamed the problems on a variety of factors, including fraud at one client and underwriting errors by the bank. But Triumph plans to stick with health care, he said. “We’re not going to throw in the towel,” Graft said.

What’s driving the spike in credit card chargeoffs and how worried should investors be?

Some factors point to the conclusion that this trend is simply a return to normalcy. Card portfolios performed exceptionally well in the post-crisis period because issuers had already charged off many bad loans; thus, it makes sense that losses would rise as consumers pay off those well-seasoned loans. The argument for greater concern is that U.S. consumers are becoming more indebted, which makes it harder for them to stay current on their credit cards. “Revolving credit grew at about 6.5% year over year,” Capital One Financial CEO Richard Fairbank said on conference call with analysts, marking “the seventh consecutive quarter it has grown much faster than household income.”

How is the residential mortgage sector responding to higher interest rates?

The Fed’s recent rate hikes have led to such a dramatic drop in mortgage refinancings that Flagstar Bancorp CEO Alessandro DiNello said he believes the industry could be facing “the most challenging six-month run for mortgage revenue that I can recall in our history.” On the bright side, bankers did see demand for home purchases pick up late in the quarter and are optimistic that demand will pick up in the spring buying season, perhaps offsetting the sharp decline in refi activity.

How are banks doing on the expense side?

By and large, banks held the line on expenses in the first quarter, largely by continuing to close branches and review vendor relationships. Among the most aggressive in reining in costs has been Fifth Third Bancorp, which in the past year has saved roughly $6 million through staff reductions and another $40 million through vendor renegotiations. At the same time, Fifth Third is aiming to reduce its risk profile by shedding loans that don’t meet certain criteria and diversify its revenue streams by investing more heavily in such business lines as payments and capital markets. “What we're looking to create is a balanced infrastructure and business that would be good through the cycle with a higher rate of fee contribution onto our revenue,” said CEO Greg Carmichael.