Fourth-quarter 2018 earnings at big banks could be hampered by lower fee growth and deposit cost concerns that might overshadow loan growth.
Analysts expect fourth-quarter earnings at the largest banks to be lower compared to the linked quarter, but revenue trends outside the big four look brighter. Banks continue to face many of the same headwinds that challenged them throughout the year, including slow loan growth coupled with rising deposit costs. But a variety of moving parts could create pockets of strength or bright spots for some institutions.
One headwind for banks that emerged during the quarter was the continued flattening of the yield curve between short and long-term Treasury bonds. The changing yield curve could curtail the benefits that short-term rates would have provided banks during the quarter, wrote Alden Securities Director of Research Joe Gladue in a Dec. 27, 2018, report.
Gladue wrote that most banks will show "modest sequential" improvements in their bottom lines for the fourth quarter of 2018 compared to both the prior quarter and the prior year. Commercial and industrial, commercial real estate and consumer loan volumes should all have "a good year," but mortgage lending may suffer, he said.
Ken Usdin, Jefferies' managing director of equity research, wrote in a Jan. 8 report that year-end annual loan growth of about 4% should bolster net interest income. He said business lending could be driven by customers switching business from nonbanks to banks, a slowdown in paydowns and businesses finally expanding their operations several quarters after corporate tax reform.
But earnings at the largest banks could be dragged down by a dearth of fee income growth. The rate of fee growth has "consistently disappointed" as consumer account behavior has shifted and mortgage originations have declined, Usdin wrote. Capital markets and investment banking, business lines missing from most banks, have also faced challenges due to economic uncertainty and could weigh on the largest banks' results.
The catalysts that drove bank earnings and stock movement for the last several years were low credit costs, lagging interest rates on deposits and efficiency gains, said Marty Mosby, director of bank and equity strategies at Vining Sparks. Mosby said he was optimistic that the industry is now inching toward the next three agents of changes: rising asset yields, excess capital deployment and eventual loan growth.
Mosby said the lackluster margin growth in the third quarter was due to how little the London interbank offered rate, or LIBOR, moved during the period. LIBOR's flatness meant that variable-rate assets did not reprice. With both LIBOR and the Fed funds rate rising during the fourth quarter, margins should increase, he said.
He also pointed out that asset yields are rising faster than deposit costs, which could push net interest margins slightly higher over the next two years.
"If the yield curve is moving up in a parallel nature, the large-cap banks can afford to have deposit betas of 100% and still maintain their margins," he said. "On a flattening yield curve, you can actually do 70% deposit betas and still maintain your margin."
Gladue was less optimistic in his report. He wrote that many banks now assume that deposit betas, or the change in the cost of deposits versus the change in the Fed funds rate, will be higher going forward and could pressure margins. While banks in his coverage universe could see margins move 4 or 5 basis points in either direction, he expects most banks' net interest margin to be flat.
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