Nine Reasons for Optimism in Banking
July 29, 2013 11:14 AM
Several major trends continued in the second quarter: strengthening credit quality, continued debt reduction and a focus on cutting costs. Revenue and loan growth remain a challenge, but signs are emerging that consumers and businesses are ready to spend again, which could bode well for bank earnings in the second half of the year and into 2014. Other potential profit drivers: a surge in wealth management income and, for some banks, a more level playing field.
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Consumers Stay on Top of Debt
Consumers are paying off their loans at impressive rates. Delinquencies on bank-issued credit cards are now at a 23-year low, according to the American Bankers Association's quarterly delinquency survey . Other types of loans that showed improvements in repayment rates during the first quarter included personal loans, auto loans, RV loans, marine loans, and home-equity loans. Lenders expect delinquencies on most consumer loans to keep falling over the next six months. One area of concern: student loans. Only 44% of lenders expect student-loan delinquencies to remain steady or decrease over the next six months, according to a recent survey conducted by Fair Isaac Co.
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Credit Card Spending Picks Up
Consumer credit grew by an annual, seasonally adjusted rate of 8.3% in May, to $2.8 trillion, twice its pace from the two previous months, according to Federal Reserve Board data released in early July. The surge was driven by a sharp increase in credit card spending. Bank of America (BAC), for example, saw its U.S. credit card portfolio stabilize in the second quarter, with spending on active accounts up 9% from a year earlier, the first increase in five years.
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Auto Drives Consumer Lending
Sixty percent of lenders surveyed by Fair Isaac said they expect the supply of consumer credit to increase over the next six months -- the same share that expects consumer credit demand to rise. It's the first time since Fair Isaac began conducting the survey three years ago that expectations for supply met the expectations for demand. The supply of auto loans is expected to be particularly strong over the next six months, the survey found .
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Businesses Eye Expansion
Business owners are feeling more bullish about the state of the economy than they have in years, and many say they are ready to start hiring again. According to the Citibank Small Business Pulse survey released in June, 48% of small-business owners describe economic conditions as "good" or "excellent," compared to 43% last year and 24% three years ago. Also, 26% said that they plan to hire full-time workers, up from 15% last year.
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Lenders Say 'Yes' More Often
Approval rates for business loans continue to rise, indicating banks' increased confidence in small firms' growth prospects. According to Biz2Credit, large banks approved 16.9% of small-business loan application in June, up from just 11% a year earlier. Small banks approved 49.8% of loans, up from 47.5% in June 2012.
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Incentives Spur Interest in SBA Loans
As part of its ongoing effort to stimulate small-business borrowing and lending, the Obama administration has proposed eliminating borrower fees on all Small Business Administration loans up to $150,000 and raising the government's guarantee on those loans from 75% to 85%. Biz2Credit CEO Rohit Arora says he expects the changes, which kick in Oct. 1, to lead to a surge in applications for SBA loans.
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Opportunities in Trade Finance
U.S. companies are exporting goods and services in record numbers and many consider global sales crucial to sustained growth. That's creating a significant opportunity for banks, many of which are beefing up their trade finance divisions. Among the most bullish on trade is HSBC North America, which recently set up a $1 billion loan program to help small and midsize businesses sell products overseas.
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Wealth is Back in Vogue
Wealth management is staging a comeback thanks to strong financial markets and an increase in the number of millionaires who have made money selling their businesses. Bank of America expanded client balances in the second quarter by 8% to $2.2 trillion from a year earlier, while assets under management jumped 11% to $76.2 billion. Wealth management income continued to be a standout among banks that cater to the wealthy like City National Bank (CYN) and First Republic Bank (FRC). Recruiting is up, too. Bank of New York Mellon (BK) plans to increase its wealth management sales force by half over the next two years.
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Basel Upshot: A More Level Playing Field
Banks with $50 billion or more of assets are facing higher capital requirements under Basel III and a slew of new compliance costs related to stress testing. Bad news for them, but perhaps good news for smaller banks spared those burdens. TCF Financial's (TCB) William Cooper says the changes "will level the playing field" over time and will help the $18.3 billion-asset TCF and other smaller banks compete against larger players. "These are big things for the banking industry, and the way they've come down are a big positive for regional banks," Cooper says.
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