6 takeaways from banks’ 1Q results

April 25, 2021 9:00 PM

Bruce Van Saun, the chairman and CEO of Citizens Financial Group, hit the nail on the head when he said “we’re kind of working through a transitory phase.”

He was referring to the regional bank’s decline in mortgage fees after a strong year last year, but he could have been talking in general about the entire industry’s first quarter.

Bank earnings strengthened, but deposits keep piling up, the mortgage business is cooling somewhat after a red hot 2020, and M&A activity is accelerating in banks’ quest for growth as the economy begins its recovery from the pandemic recession.

An upswing in commercial loan demand would solve some problems and alleviate pressures on management, especially on new CEOs like Jane Fraser of Citigroup and Kevin Blair of Synovus Financial. Many executives have expressed confidence that loan growth is around the corner, but others — most notably Bill Demchak, chairman and CEO of PNC Financial Services Group — say the timing of the rebound is much harder to peg.

One bright spot in the quarter was the widespread release of loan-loss reserves. Still, banks wish they had a better feel for the pace of recovery in coming months.

Here are six takeaways from first-quarter 2021 results, all with an eye toward the questions banks hope to be able to answer more clearly three months from now.

Contributors to this cardshow: Laura Alix, Jim Dobbs, Allissa Kline, Jon Prior, John Reosti, Paul Davis and Dean Anason.

Second-half rebound in business lending is no sure thing

Many banking executives said during first-quarter earnings calls that they expect commercial loan growth to pick up in the second half of the year. The rosier outlooks presume the economy will take off as more Americans get vaccinated and the COVID-19 pandemic fades.

Bill Demchak (pictured), chairman and CEO of PNC Financial Services Group, was more skeptical — and he wasn’t alone.

“We could sit here and tell you … and I watched some of these calls … that the back half of the year is going to be great, everything will be wonderful — I hope they're right. And if they're right, we'll do really well,” Demchak said on an April 16 call with analysts. “But I can't promise you that specific time. ... By the way, nobody else can either.”

Bank of America and Wells Fargo were out of the gates with predictions for a second-half rebound in lending, but JPMorgan Chase Chief Financial Officer Jennifer Piepszak said such timing “remains to be seen.”

Cash-rich businesses that tapped their credit lines early in the pandemic are an X-factor. It’s unclear when these clients will need to borrow again to build inventory and meet reawakening consumer demand.

Large regionals like Truist Financial in Charlotte, N.C., expect loan growth to come back as soon as the second quarter. And executives at KeyCorp in Cleveland said 2021 will be its best commercial lending year on record once economic activity picks up. Huntington Bancshares is so confident in an economic boost this year that the Columbus, Ohio, company has been hiring more bankers to get ready.

Demchak says loan growth will return, but he said he’s just not ready to make a sure bet on when.

“I guess it’s just hesitancy waiting for more certainty on the pandemic,” Demchak said. “But when that happens — and it will happen, it almost mechanically has to happen — you're going to see pretty appreciable loan growth. We just don't know when that's going to be.”

Bank M&A activity is gathering momentum

Bank merger-and-acquisition activity is starting to accelerate, with 13 deals announced in March after only five a month earlier, according to data compiled by S&P Global Market Intelligence. There were 10 more deals announced in the first three weeks of April.

While the majority of sellers in 2021 have been community banks, the price of six of the deals exceeded $500 million — on par with all of 2020. Two of the bigger agreements — BancorpSouth Bank's $2.8 billion proposed purchase of Cadence Bancorp. and Webster Financial's $5.1 billion pending deal for Sterling Bancorp — were announced in April.

In the wake of those announcements, several bank executives during earnings calls advertised their increasing interest in M&A. Would-be buyers say credit-quality and economic conditions make it simpler now to identify appealing targets and fair prices. A recovery in bank stock prices this year also gives acquirers added buying power.

“Our appetite is back,” said James Ryan III, chairman and CEO of the $23.7 billion-asset Old National Bancorp in Evansville, Ind.

Home BancShares in Conway, Ark., is in talks with at least three targets and could soon announce its first deal in four years, Johnny Allison (pictured), the $17 billion-asset company's chairman CEO, said during a recent earnings call. "We're working on one as we speak,” Allison said. “And then we'll move to the next one and the next one."

Yet some companies, including Zions Bancorp. in Salt Lake City, want to see the economy gain further momentum before striking deals. Others, such as Synovus Financial in Columbus, Ga., pointed to an abundance of organic growth opportunities as the pandemic fades and pent-up demand gets unleashed, leaving little need for M&A.

Mortgage boom shows signs of cooling

Mortgage banking continued to lift revenue for many banks in the first quarter. The question is how much momentum may be left in that business.

Combined first-quarter mortgage volume rose 3% from the prior quarter and 21% from the year-ago quarter among a group of eight large banks tracked by Keefe Bruyette & Woods, suggesting that some banks may be regaining market share from nonbank competitors.

The method of origination made a difference, however. Banks that did more mortgage volume via retail channels saw stronger performance than those that relied largely on correspondent channels as gain-on-sale margins fell, according to a Piper Sandler report.

The Mortgage Bankers Association said recently that it expects full-year mortgage origination volume to fall 14% from last year, though the organization noted that at a projected $3.28 trillion, that would still be the third-highest total ever.

Bank executives remained generally positive on the mortgage outlook but also cautioned that revenues could come down in the year ahead simply because last year’s volume was so high.

Citizens Financial Group in Providence, R.I., for example, saw mortgage banking fees fall 15% from the prior quarter to $165 million, although they were still 4% higher than the same quarter in 2020. While production levels remained strong, the $187 billion-asset Citizens cited heightened competition and industry capacity as factors behind that sequential decline.

“We're kind of working through a transitory phase where the mortgage revenue has to reset," Chairman and CEO Bruce Van Saun (pictured) said while discussing the company’s quarterly earnings. “It was a huge boon for last year.”

Deposit glut presents hard choices

Banks are awash in even more deposits than they were at the end of last year thanks to a third round of stimulus funding and reduced spending, and the pressure on net interest margins keeps building given muted loan demand.

To ease the pain, some banks continue to plow excess liquidity into securities to get at least some return. Still, it’s hard to tell how long those deposits will stick around if the economy keeps stabilizing.

Some banks say they’d prefer to wait and pour those deposits into loans once demand rises.

Bank of America is knee-deep in deposits, but Chairman and CEO Brian Moynihan said he anticipates that some of that liquidity will go into loans later this year.

Already there are signs that some segments of lending are picking up, including consumer lending, which is in “full recovery mode,” Moynihan said.

M&T Bank in Buffalo, N.Y., is waiting it out, at least for now. The $150.5-billion asset company — which has an excess of $20 billion of deposits beyond what it needs to back loans and meet regulatory requirements — is hesitant to buy “low-return assets” like securities when the deposits could be transitory, Chairman and CEO René Jones (pictured) told analysts during an earnings call.

Credit-quality concerns are easing

A year’s time made a dramatic difference in asset quality.

Concern over the coronavirus pandemic and resulting economic shutdowns pushed loan-loss provisions to stratospheric levels a year ago. Provisions started declining later in the year — a trend that continued into the first quarter of 2021.

Federal stimulus helped many borrowers weather 2020, and now many banks are releasing reserves. The moves have provided a lift to banks’ bottom lines during the first quarter.

Wells Fargo, Bank of America and U.S. Bancorp were among the big banks to record negative provisions during the quarter. Several small and midsize banks also released reserves.

“Credit has improved dramatically” in the last two quarters, said Philip Flynn (pictured), president and CEO of Associated Banc-Corp, during the Green Bay, Wis., company’s quarterly earnings call.

“We’re getting remarkable outcomes in credits that we were concerned about, stuff that we thought we had lost [but] has been fully repaid,” Flynn added.

Other companies are changing their charge-off forecasts to reflect an improved outlook.

KeyCorp in Cleveland lowered its net charge-off outlook for 2021 from 0.5% to 0.6% of total loans to 0.35% to 0.4%. Huntington Bancshares in Columbus, Ohio, said it expects this year’s net charge-offs to total 0.3% to 0.4% of total loans, down from its prior forecast of 0.35% to 0.55%.

New CEOs get down to business

Banks of all sizes are throwing new leaders into a crucible of managerial and economic challenges this year.

Jane Fraser instilled a sense of urgency in her first earnings call since becoming CEO of Citigroup in March. The company is refocusing on core businesses to boost long-lagging returns and is spending billions of dollars to overhaul its risk management and internal-controls systems in the face of federal enforcement actions.

“Look, we’re already getting going,” she said on the April 15 call in explaining the company’s decision to offload consumer operations in 13 overseas markets. “There’s no dilly-dallying here.”

She played up growth prospects in its wealth management, cards and Mexican retail operations; touted Citi’s affluent clientele; and even left open the possibility of U.S. acquisitions.

Elsewhere, Kevin Blair at Synovus had to fend off questions from analysts about the $55.2 billion-asset company’s interest in M&A on Tuesday — the day before he officially took over as CEO.

Blair said the company has the scale to pursue growth opportunities without buying another bank.

“We also feel that we've been very capable in attracting talent and adding new products” as well as eking out efficiencies internally, Blair said during the company’s earnings call. He also said there has been “a concerted strategy to accelerate the growth in our fee-income-generation businesses.”

Meanwhile, Rob Holmes took over as president and CEO of Texas Capital Bancshares in January, after the Dallas company had absorbed several shocks tied to the pandemic. The $40 billion-asset company terminated a merger pact with Independent Bank Group in McKinney, Texas, and suffered steep losses in its energy dealings.

Holmes has already made several moves to get Texas Capital back on track, including raising $300 million in capital by selling preferred stock and agreeing to sell the company’s correspondent banking business to a unit of Ocwen Financial. The former JPMorgan Chase executive has vowed to reallocate funds from that business to support growth in other areas as well as provide a complete strategic plan during the third quarter.

“I can assure you I did not leave my last role to lead an average bank,” Holmes told analysts during an earnings call on Wednesday.