The BAN Report: FDIC Releases Quarterly Banking Profile / Black Friday Exceeds Expectations / SBA Loosens-11/30/17
FDIC Releases Quarterly Banking Profile
The FDIC released its third quarter Quarterly Banking Profile, the most comprehensive overview of the performance of the banking industry. A few highlights:
- As most banks benefit from higher interest rates, net interest margin (expanded 12 basis points from a year earlier to 3.30%. It improved by 8 basis points from 3.22% in the prior quarter, so that is pretty good progress in one quarter.
- Non interest income was down 1% from the prior year, driven by reduced loan sale revenue and servicing fee income
- Overall, quarterly net income increased by 5.2% from the prior year. Average ROA rose from 1.12% to 1.10%.
- While noncurrent loans declined overall, noncurrent credit card and auto loans spiked by 12.4% and 20.3%, respectively. With higher interest rates on the horizon, noncurrent loan balances are likely to increase.
- Loan growth was disappointing, as total loan and lease balances only grew by 1% during the quarter and 3.5% in the last 12 months. Credit card balances and C & D lending grew at higher levels, while C & I loans grew only 0.3% from the prior year. The lack of loan growth, especially within C & I, is confounding since GDP has grown at over 3% for two straight quarters. Nevertheless, community banks have showed stronger loan growth than the larger banks, as they grew loans at about twice the rate of the overall industry.
With respect to loan growth, the Wall Street Journal observed:
While loan balances are still rising, the slowing rate of growth has defied the expectations of bankers. Many have spent the year looking for growth-reviving catalysts that never came and remain puzzled by the slowdown.
Even more surprising is that falling rates of loan growth are occurring as many signals point to a more buoyant U.S. economy. Unemployment continues to decline, gross domestic product growth came in at 3% in the third quarter and business investment is rising.
Tepid rates of loan growth along with continued low long-term interest rates have taken some of the sizzle out of bank stocks.
This is putting 2017 on track to be the worst year for business-loan growth since 2010, when the economy was still wrestling with the immediate aftermath of the financial crisis.
Why that is remains unclear. Throughout the year, some banks have said that more subdued business lending was due to a lack of clarity from Washington on the fate of key initiatives such as taxes and health care.
Such worries should eventually fade, though, said Darren King, finance chief at M&T Bank Corp. , where loans in the third quarter were down 2% versus a year earlier. “Business owners are eventually going to get to the point where they say, ‘I can’t wait to find out what is going to happen in Washington,’ ” he said.
Fortunately, the next few weeks should see some clarity in tax reform, so perhaps Washington uncertainty will wane.
Black Friday Exceeds Expectations
From Thanksgiving day through Cyber Monday, more than 174 million Americans shopped in stores and online, beating prior estimates, according to a survey by the National Retail Federation.
From Thanksgiving Day through Cyber Monday, more than 174 million Americans shopped in stores and online during the just-concluded holiday weekend, beating the 164 million estimated shoppers from an earlier survey by the National Retail Federation and Prosper Insights & Analytics.
Average spending per person over the five-day period was $335.47, with $250.78 — 75 percent — specifically going toward gifts. The biggest spenders were older Millennials (25-34 years old) at $419.52.
“All the fundamentals were in place for consumers to take advantage of incredible deals and promotions retailers had to offer,” NRF President and CEO Matthew Shay said. “From good weather across the country to low unemployment and strong consumer confidence, the climate was right, literally and figuratively, for consumers to tackle their holiday shopping lists online and in stores.”
Top shopping destinations included department stores (43 percent), online retailers (42 percent), electronic stores (32 percent), clothing and accessories stores (31 percent) and discount stores (also 31 percent). Some of the most popular gifts purchased included clothing or accessories (58 percent), toys (38 percent), books and other media (31 percent), electronics (30 percent) and gift cards (23 percent).
Increasingly, consumers are shopping both online and in stores, and those consumers spend more, on average.
This week the SBA made a significant change to the 7(a) program, reducing the equity requirements for business acquisition loans from 25 to 10%.
The SBA recently disclosed that it will slash the equity required for most change-in-ownership loans from 25% to 10%, a move that should make financing for acquisitions more accessible. The change is part of a broader overhaul of the standard operating procedure, or SOP, that governs 7(a) and 504, the SBA’s largest lending programs.
While the rewrite has dozens of modifications intended to streamline and improve the SOP, the lower equity requirement “is the big one,” said Gregory Caruso, a partner at Harvest Business Advisors in Princeton, N.J.
Even with the current, higher equity requirement, the 7(a) program has grown in popularity in recent years. In the first six weeks of the SBA’s 2018 fiscal year, which began Oct. 1, the 7(a) program backed loans totaling roughly $3 billion, a nearly 11% increase from a year earlier. Overall 7(a) volume has set records in three straight years, reaching $25.8 billion in fiscal 2017.
An easing on equity standards for change-in-control loans is likely to push the numbers even higher because it meshes almost perfectly with forces that are currently driving the market, said Tom Pretty, head of SBA lending at the $285.4 billion-asset TD Bank.
We think this change is ill-advised as these loans are some of the riskiest loans in the SBA portfolio. With 7(a) volume well exceeded small business loan growth, which often signals trouble ahead, we can only scratch our heads.