Latest News

Clark Street CEO on Q1 Earnings

Hopes continue to run high that community banks will show ongoing loan growth with their first-quarter earnings reports, despite concerns about the oil-price crash and the turbulence in markets this year.

Industry observers are generally optimistic that, when banks release results in April, small banks, collectively, will report positive momentum on the lending front, as they did to close out 2015. An S&P Global Market Intelligence analysis found that median loan growth among banks under $10 billion in assets in the fourth quarter of last year topped 1.7%, when compared with the previous reporting period. Banks benefited from steady activity in commercial real estate and commercial-and-industrial lending.

The overall growth was hardly robust, but observers say modest but steady progression in the slow economic expansion of recent years is the best most lenders should expect.

“So to the extent they are able to continue to put on loans, show some growth, that’s going to be a theme” during earnings season, Clark Street Capital CEO Jon Winick said in an interview.

The year launched on a dreary note, with stock markets swooning amid worries about a protracted oil slump and global economic woe. Bank stocks were among the hardest hit, with investors concerned that macro conditions could prevent the Federal Reserve from lifting interest rates this year. That would leave lenders grappling with a historically low rate environment that has crimped lending profitability and stunted net interest margins.

But the mood is shifting.

The SNL U.S. Bank Index is still off about 11% on the year, but since mid-February, it has regained about half of what it lost early in 2016. Investor worry has given way to a more cheerful view as employment data continues to prove strong and Fed officials suggested that rate increases remain on the table this year.

The U.S. Labor Department reported this month that total nonfarm payroll employment increased by 242,000 jobs in February. It also issued upward revisions to previous months, with December 2015 gains pushed to 271,000 from 262,000 and those for January revised to 172,000 from 151,000. The unemployment rate in February held at 4.9%.

While the Fed’s monetary policymaking committee this month kept its key interest rate within a target range of 25 basis points to 50 basis points in light of weakness in energy and global concerns, officials signaled they remained on track to continue lifting rates this year, building off of the initial hike they made late last year. Vulnerable economies in Europe and Asia are still top of mind, but officials suggested that problems in these regions are not likely to infect and derail the U.S. economy.

Barring new or worsening troubles, Fed Chair Janet Yellen said during a March press conference that most policymakers think “some further adjustments in the federal funds rate will be appropriate, but gradual.”

Lawrence White, an economist at New York University’s Stern School of Business and a veteran bank observer, said in an interview that markets are looking for up to two rate increases this year. Though Yellen suggested a rate increase is possible in April, White envisions bumps coming midyear or later, when it is clear that domestic real estate markets and broader economic activity are both on solid footing during the summer months.

Higher rates could boost loan yields and the margins of asset-sensitive banks. Color on rate expectations is sure to be highly valued during earnings season.

White said that while low oil prices are hurting energy-centric markets in states like Texas and Oklahoma — and by extension raising concerns about credit quality for banks with heavy direct exposure to such areas — the low gasoline costs that have accompanied the oil downturn have begun to bolster consumers’ spending power and confidence. This could continue to help drive home- and car-buying activity this spring and summer, supporting the economy and feeding loan demand.

“There are pockets of pain with oil, and we need to all acknowledge and pay attention to that, but the net result I think is positive,” White said.

What’s more, as BMO Private Bank Chief Investment Officer Jack Ablin pointed out in an email, oil prices have begun to recover some lost ground this month. Per-barrel crude oil prices had dipped into the $20s earlier this year amid a supply glut, but they have since climbed back to around $40 in March. Ablin said it appears that a floor may have been established beneath oil prices. While a rapid rebound is unlikely, he suggested, the energy industry may have seen the worst of the cycle.

That noted, analysts and investors are sure to hone in on banks with energy exposure during earnings season, looking for signs of broader credit issues and assurances that lenders are adequately reserved for potential loan losses. “It will definitely be interesting to see how that goes,” Winick said.

BAN Report Sign-up