31 Jul, 2023
S&P webinar: Earnings pressures could trigger bank M&A push
➤ High interest rates and the recent liquidity crunch have put a premium on deposits.
➤ Difficulties in the commercial real estate portfolios will hurt, but banks should be able to absorb the pain.
➤ "Important discussions" lie ahead for US banks as earnings pressures rise.
Not only are banks dealing with recent turmoil in the banking sector, but they are also increasing provisions for upcoming challenges in the commercial real estate sector, the impacts of the ongoing Federal Reserve rate-hike cycle, the end of COVID-19-era stimulus and post-pandemic consumer behavior.
All this was nonetheless "manageable," Stovall said during the Market Intelligence-hosted "Q3 Outlook for Commercial Banks as Rates Remain Higher for Longer" webinar — but there would be institutions who have had "little to no earnings growth for the last few years."
"We think [earnings] margins have peaked ... and that earnings are going to fall this year as margins [are] compressed, but also as you see banks continue to build reserves. I think that leads to some challenging board conversations and perhaps is a harbinger for M&A activity, which remains quite depressed right now," Stovall said, adding that there had already been some signs of the M&A market coming back to life.
Deposit outflows
A particular concern for banks has been deposit outflows following the collapse of US regional banks earlier in 2023. Measures being taken to deal with this include banks relying on expensive borrowings, such as certificates of deposits, and offering higher rates to depositors.
"The really fast pace of tightening by the Fed, and of course the liquidity crunch that erupted in March, has put a far greater premium on deposits. It's the true value of banking franchises, and we've had a very firm reminder of that, and we've seen the entire industry react," Stovall said.
One factor that could prove a particular challenge for banks is the commercial real estate (CRE) sector, which is under pressure in a post-pandemic context. This will "hurt" banks, but the pain will at least be spread out over time.
"There will be some stress here, but ... these are relatively small portions of banks' portfolios, and it will take time to come to pass. This is not all going to hit all at once," Stovall said.
The concerns about CRE were also highlighted in the "2023 US Bank Outlook Survey," David Hayes, a senior analyst at Market Intelligence, said during the webinar. Some 42% of the 150 respondents — half at the c-suite level — said that over the next 12 months, they expect these types of loans to have lower credit quality at their organizations.
"Two out of five respondents expected commercial real estate to have lower credit quality over the next 12 months; [the] next was personal automobile," Hayes said.
The survey also showed that about 47% of the 150 respondents believe that deposits at their institutions would increase over the next 12 months, but this number was down from the previous two iterations of the survey.
"The general trend is slightly less bullish over time," Hayes said.
The first survey was conducted between mid-November 2022 and mid-December 2022, while the second came at the height of turmoil in the industry in March. The most recent survey was from early June to early July.