Kevin Dobbsis a senior reporter and columnist. The views and opinions expressed in thispiece represent those of the author or his sources and not necessarily those ofS&P Global Market Intelligence.
Slowingcommercial loan growth and continued downward pressure on net interest marginsare themes likely to permeate U.S. community bank earnings season this month,analysts say.
KeefeBruyette & Woods analyst JeffersonHarralson said that recent Federal Reserve H.8 data and color frombankers indicate that, while still growing, commercial-and-industrial lendingadvanced at a slower pace in the third quarter than in the previous quarter.C&I lending is a core business line for most community banks.
"Thereappears to be some sluggishness," Harralsonsaid in an interview.
He and other analysts say that, amid concerns aboutglobal economic weakness and domestic uncertainty around the loomingpresidential election, some business owners have shelved or scaled back investmentsin growth, curbing loan demand.
Harralson said that, among the community banks itcovers, KBW anticipates earnings reports will collectively show annualized loangrowth of 9% in the third quarter. That is still decent, Harralson said, but itwould be down from 12% the previous quarter. KBW projects community lenders toproduce third-quarter year-over-year EPS growth of 8%, but on a sequentialbasis, it looks for earnings to prove flat, held in check by the slower loangrowth and declining margins.
While an upward move in LIBOR during the thirdquarter may have helped a few banks' NIMs, Harralson said historically low interest rates that cut into theprofits that banks make on lending likely resulted in modest margin contractionfor community banks overall. "Margins are still heading lower," hesaid, estimating that NIMs on average dipped about 3 basis points amongcommunity lenders in the third quarter.
FederalReserve policymakers lifted rates by a quarter of a percentage point late in2015, marking the first upward move in years. But they did not tack on theadditional hikes in the first half of this year that many bankers and analystshad hoped for — the Fed's policy armcited the global economic fragility — and thatwere needed to meaningfully bolster NIMs.
Harralson noted that the market had recently priced a 50% chance of arate increase by the end of this year, but he also pointed out that historysuggests otherwise. That is why KBW's models do not show a rate hike until late2018 and why Harralson does notenvision a reversal on the margin front for several quarters to come.
Raymond James bank analysts' preview of third-quarter earnings meshes with that of Harralson and company. "All in,we expect somewhat softer" results when compared with the , the analystssaid in a report. They added that that earnings calls are likely to be"dominated by NIM and loan growth expectations."
JoeGladue, research director at Merion CapitalGroup, echoed that sentiment. "A good percentage of the banks Ifollow will see a little margin compression," he said in an interview. Itis "nothing alarming, but I see NIMs slowly drifting down each quarter. …And I think we all have seen the suggestions that C&I lending is slowingdown some."
Gladuealso said he and his analyst colleagues will listen for color on potentialpullbacks in commercial real estate lending, as well, given that regulators,concerned about overheating, have this year cautioned banks to be careful onthat front. "We know the regulators are putting increased emphasis onCRE concentrationlimits," he said, "and so that could lead to some slowdown there."
Thoseworries noted, Gladue did emphasize that the domestic economy, bolstered by asolid job market over the summer months, has continued to move in a positivedirection, albeit gradually, providing community banks with a generallyfavorable macro environment. The national joblessrate held at 4.9% for the third consecutive month in August, andover the course of the three summer months, employers added an average of 232,000 jobs per month, according to the U.S. Department of Labor.
"Thedata indicate that the economy is continuing to grind along," Gladue said.Against that backdrop, he and most analysts say banks' credit quality, astrength for several years, likely held up well in the third quarter.
Uniqueto the looming earnings season, Gladue added, is an expectation for pervasiveconversations about cross-selling, given the scandal that erupted in September. That is whenregulators hit Wells Fargo &Co. with $185 million in fines after learning that thousands of thebank's retail employees, allegedly under pressure to maximize sales, openedsome 2 million sham accounts over several years.
"Clearly,Wells was the prime example and cheerleader of aggressive cross-selling,"Gladue said. "Most banks have paid at least some lip service to trying todo it, and so certainly among those that really championed it, they willprobably get a lot of questions about their own programs and how theirincentives work."