5 takeaways from banks' 4Q results

If there has been one consistent theme in banks’ fourth-quarter earnings results it’s that commercial-and-industrial lending is finally showing signs of a comeback.

C&I lending had slumped since corporate tax rates were slashed in late 2017 as part a federal tax overhaul — companies were saving so much in taxes that they didn’t need to take out loans — but bankers say that demand for loans began to pick up early in the fourth quarter and really accelerated in December.

The result: Regional banking companies such as Fifth Third Bancorp, SunTrust Banks, Zions Bancorp., Regions Financial and M&T Bank reported C&I loan growth in the mid-to-high single digits and executives said on fourth-quarter earnings calls that they expect the momentum to continue in 2019. East West Bancorp, Associated Banc-Corp and Signature Bank all said that their C&I portfolios expanded by around 12%.

It was an even stronger quarter for smaller banks, with institutions holding less than $20 billion of assets reporting an average increase in loan balances — driven largely by C&I lending — of 9.2% year over year, according to data compiled by FIG Partners.

Still, some bankers and industry experts are preaching caution.

Zions said in a slide presentation that competition from nonbank commercial lenders is increasing and could suppress loan growth this year.

There are plenty of rumblings, too, that some loan growth at some banks may be a result of the fact that they are relaxing standards in order to win deals. Old National Bancorp Chairman and CEO Robert Jones said on an earnings call that while structure and pricing are by and large “logical,” he is seeing “pockets of silliness” from some competitors.

Some large banks, including PNC Financial Services Group and JPMorgan Chase, are increasing reserves for loan losses partly to account for anticipated loan growth but also out of concern that credit quality could weaken.

Delinquencies and charge-offs are at or near historic lows but, as PNC Chairman and CEO William Demchak (above) said on the company’s fourth-quarter earnings call, “Things can’t stay this low forever.”

Robust demand for new loans is obviously good news for banks, but finding cheap deposits to fund those loans is arguably banks’ greatest challenge these days.

With interest rates rising, all banks are being forced to raise rates on savings products to attract and retain deposits, and the result is that funding costs in the fourth quarter increased by an average of 39 basis points from a year earlier, according to an analysis of earnings reports compiled by Sandler O’Neill & Partners.

Even so, deposit growth at many banks is unable to keep pace with loan growth, in part because customers are moving at least some of their money to online-only banks that are paying market-leading rates. SunTrust reported a 6% increase in loans year over year but only a 1% increase in deposits. It was a similar story at U.S. Bancorp.

Joseph DePaolo, the CEO of Signature Bank in New York, likened the deposit battle to “a steel-cage match.”

“I haven’t seen it this competitive in my lifetime,” DePaolo (above) said on the bank’s earnings call.

Historically, Signature’s strategy for adding deposits has been to hire teams of bankers in the New York metropolitan market with established customer relationships. To accelerate deposit growth at a time of increasing competition, it set up shop in San Francisco in mid-2017 and began hiring banking teams on the West Coast.

U.S. Bank is also eyeing new markets. Now freed from consent order that it had tied up capital and constrained its expansion plans, the company is ready to speed up its plan to add branches in markets in Texas and the Southeast, where it has no branches but many borrowers.

It plans to target consumers who may have a mortgage, car loan or credit card with U.S. Bank.

Leveraged lending poses a quandary for banks. It’s high-risk because borrowers tend not to have investment-grade ratings, but it’s potentially high-reward because the loans offer higher yields than other commercial loans and their floating rates tend to reset quickly when rates rise. Indeed, as demand for traditional commercial loans began to slow over the last couple of years, many turned to leveraged lending to help pick up the slack.

Now one bank is tapping the brakes.

Texas Capital Bancshares said Wednesday that while it is not exiting the business of leveraged lending, it plans to stop making new leveraged loans for the next year or two because credit quality is beginning to weaken.
In the fourth quarter, the bank increased its provision for loan losses to $35 million from just $2 million a year earlier, after charging off tens of millions of dollars of leveraged loans to companies in the health care, fast food and energy industries.

In an earnings call with analysts, Texas Capital CEO Keith Cargill (above) said that weakness in leveraged lending “began to rear its ugly head in the second quarter” and that the company would stop originating new leveraged loans “until the cycle runs its course.”

Now that C&I lending has rebounded, will other banks, similarly wary of leveraged lending, follow suit?