Big banks'vulnerability to the oil-and-gas recession and their ability to maintain solid creditquality outside of energy are top of mind early in 2016. Those challenges, coupledwith banks' ability to continue to advance lending enough to grow interest incomein the face of stubbornly low rates, could mesh to form the fabric of first-quarterearnings season, analysts say.
What'smore, the first quarter of most years is seasonally weak, as activity in businesslines such as mortgages is usually light in winter months, and as banks absorb one-timehits to expenses such as annual compensation increases and boosts to employee benefitcosts.
"It'straditionally the weakest quarter of the year," ScottSiefers, an analyst at Sandler O'Neill & Partners, said in an interview. "It'sthe worst-kept secret around."
Thisyear, amid the stock market slump in January and February, analysts say big bankscould also report lower fee-income levels in certain operations tied to markets.
Among 20 major U.S. banking companies analyzed bySNL Financial, which is an offering of S&P Global Market Intelligence, analystson average expect half of them to post first-quarter noninterest expense levelsthat are greater than the previous quarter and 13 of them to report noninterestincome levels that are lower.
First-quarter net income is projected to fall sequentiallyat 16 of the 20 companies analyzed.
Big-bank earnings season gets rolling next week whenJPMorgan Chase & Co.reports April 13. Wells Fargo &Co., Bank of America Corp.and Citigroup Inc. allreport later the same week.
Banks with any energy exposure are sure to get plenty of attentionduring earnings season, analysts say, as an oil-price slump that dates to mid-2014drags on. Crude oil prices that had surpassed $100 per barrel in the summer of 2014fell below $30 earlier this year and have hovered in the $30s in early April. Naturalgas prices also have held at low levels.
The drawn-out downturn has wounded banks' energy borrowers, hurtingcredit quality and forcing some lenders to boost provisions to protect against increasingly likely losses on loans tooil-and-gas sector clients.
"Energyis what everybody is fixated on, appropriately," Sieferssaid. "Unfortunately, the energy story continues to be a work in progress,and it's likely to get worse before it gets better."
Sterne Agee CRT analyst Peter Winter holds a similarview. "Credit costs are expected to rise," he saidin a report. "Energy will be the main culprit." He said banks focusedon Texas likely will see the most pressure, along with a few regional banks withnotable energy exposure in Texas and neighboring states, including , Regions Financial Corp. and SunTrust Banks Inc.
A recent SNL Financial analysis found that in Texas, banks increased provisioningby 71.94% year over year to $1.17 billion in 2015. The percentage increase was nearlytriple that for banks nationwide. The lofty percentage jump was due in part to thefact that provisioning was at exceptionally low levels prior to last year, but analystssay such an increase also does reflect emerging credit issues.
Energyaside, credit appears solid, though for many the declining credit costs that proppedup earnings in recent years, forming a reliable tailwind, are gradually shiftingto become a headwind as the cycle normalizes. As banks grow loans, they inevitablywill have to end reserve releases and some will even need to bump up reserves asthe year wears on, analysts say.
"Outside of energy," Winter wrote, "credit appearsto be benign; however, we believe the bank group has reached a point where theywill start building reserves and net charge-offs should increase, albeit gradually,as credit costs begin the process of normalizing from historical low levels."
Analysts on average look for 16 of the big 20 banks analyzed by SNLto report first-quarter provision levels that are higher than the previous quarter.A majority of the 20 banks are expected to report higher levels of net charge-offsas a percentage of average loans.
Analystsalso will be looking for loan growth and color on interest rates during earningsseason.
Siefers and others are generally anticipating decent sequential expansionof loan books among the big banks, with particular strength on the commercial side.That growth is important because banks need loan volume to generate notable interestincome and drive revenue growth, given that interest rates have stuck near historiclows for years and could remain low this year. Low rates have crimped lenders' netinterest margins.
"Thevolume side of the interest income equation is pretty good," Siefers said. "But the margin is more of a mixedpicture."
Analysts expect 11 of the big 20 banks analyzed to report first-quarterrevenue levels that are higher than the previous quarter.
Federal Reserve policymakers in December lifted their benchmark short-termrate by 25 basis points, bringing it off a zero-bound range. It was the first rateincrease since prior to the 2008 financial crisis and bankers at the time hopedit would mark the first of several more to come because higher rates could makeloans more profitable.
But the Fed's policy arm has in meetings since then opted , pointing toglobal economic fragility, domestic energy concerns and sluggish U.S. economic growthin the first quarter. The Federal Reserve Bank ofAtlanta on April 5 estimated that GDP expanded at an anemic 0.4% seasonally adjustedannual rate during the first three months of this year. That was down from an earlierestimate of 0.7%.
Sieferssaid banks are hoping to get further rate increases this year because many of themwill need margin expansion to offset emerging credit headwinds.
But whileFed watchers say policymakers continue to signal that additional hikes are possiblethis year, it remains a guessing game on whether another increase will happen beforethe second half of 2016.
"It'shard for the Fed to raise rates when GDP has trended down," Scott Brown, chiefeconomist at Raymond James, said in an interview. He does not expect a rate increasebefore September. "They'll want to see a rebound in the second quarter andmaybe even some stronger growth in the third before they'll really be comfortablethe economy is still on track."
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