Bank executives drop hints about Q3 results

September 14, 2022 9:00 PM

In a preview of the industry's third-quarter results, top executives at large and regional banks spoke this week about recent trends in loan growth, deposits, consumer spending and fee income.

Their remarks suggest that the industry's quarterly results, which banks will start reporting next month, may be weaker than they were between April and June, when strong loan growth bolstered net income.

The comments, which came at the Barclays Global Financial Services Conference, also indicate that executives have some fear about the possibility of the U.S. economy tipping into a recession as the Federal Reserve aggressively hikes interest rates in a bid to tame inflation.

"We're not calling a recession, but our view is, given the current environment, we should just be taking a conservative stance," said Doug Shulman, CEO of the nonbank consumer lender OneMain Holdings.

What follows are four key takeaways from the executives' comments.

Bloomberg

Consumers spending more, but cracks starting to appear near the bottom

Low unemployment levels and wage gains are keeping the majority of consumers healthy, allowing them to increase spending despite high levels of inflation, according to bank executives.

At Bank of America, consumer spending increased about 10% year over year in August, CEO Brian Moynihan said this week. Rising costs drove some, but not all, of that increase. Moynihan pointed out that transactions also rose about 6% during that period.

Meanwhile, JPMorgan Chase said revolving credit-card balances are on the rise and expected to reach 2019 levels next year. And at Discover Financial Services, sales are up 15.5% year over year through August.

"The consumer behavior in terms of both sales activity as well as payment rate have been super high, above expectations," said John Greene, Discover's chief financial officer.

Consumer delinquencies remain near record-low levels, defying previous forecasts that they would have rebounded to pre-pandemic levels by now. But bank executives predict that will change toward the end of this year or in 2023.

"We don't expect any sort of dramatic events or dramatic changes in credit quality, but we will move back toward a more normalized environment," said Regions Financial CEO John Turner.

Already, lenders are reporting growing weakness among customers with lower incomes and credit scores. OneMain has made several adjustments to its credit box this year, including reducing unsecured loans to customers deemed risky, Shulman said.

"If you don't have as much cushion and you have an increase in basic living expenses — gas, housing, utilities, food, those kinds of things — you start to have to triage, and some people are having trouble paying," Shulman said.

— Orla McCaffrey

Deposit outflows continue, but they are not yet sparking competition

The Fed's rapid interest rate increases are starting to put a bit of pressure on banks' deposit costs, but bankers said the environment remains mild.

Commercial customers, which are seeking higher rates for the money they put at the bank, are the main source of the early cost pressures. But consumers have not demanded higher rates, bankers said, and so far everything has been within expectations.

"Overall, things are playing out as we thought," said Wells Fargo Chief Financial Officer Michael Santomassimo.

Like others in the industry, Wells reported a decline in its deposits during the second quarter, a trend that has continued in the third quarter. Though deposits remain far above pre-pandemic levels, industrywide deposits fell 1.9% to $19.6 trillion last quarter, the Federal Deposit Insurance Corp. said last week.

But so far, the deposit outflows do not appear to be pushing banks to compete by offering higher rates. The repricing has been "a bit slower than we were expecting," said Daniel Pinto, JPMorgan Chase's president and chief operating officer.

Dallas-based Comerica Bank, which is more reliant on commercial deposits than many other banks, said its more rate-sensitive customers have moved their balances to other banks or into investments that offer higher yields.

Comerica has "not yet seen it necessary to match the highest bidder," helping keep its funding costs subdued by not playing much into that competition, said Comerica Chairman, President and CEO Curtis Farmer.

"However, with the extraordinary pace the Fed has been increasing rates, we expect rates to begin to increase more meaningfully," Farmer said.

— Polo Rocha

The acceleration in loan growth is starting to lose some steam

The strong loan growth that materialized during the first half of the year appears to be slowing at some banks, reflecting the impact of rising interest rates and recessionary fears.

While loan growth across most categories has been largely steady during the third quarter, some bankers are predicting that the pace of such growth can't be maintained for the rest of the year.

At Truist Financial, overall loan growth "continues to be productive and continues on a nice pace," but not with the same gusto seen in the second quarter, said CEO Bill Rogers.

During the second quarter, Charlotte, North Carolina-based Truist reported end-of-period loan growth of 4.7% from the first quarter, while average loan balances grew 2.8%.

"That's sort of not sustainable," Rogers said, referring to the quarter-over-quarter uptick. But he added that loan growth continues to be strong in areas that are important to Truist, such as commercial and industrial loans.

Executives from Wells Fargo, Fifth Third Bancorp and Regions Financial echoed Rogers' comments.

Birmingham, Alabama-based Regions is experiencing "good loan growth" across its commercial and consumer portfolios, Turner said Wednesday.

Average loans rose 3% between the first quarter and the second quarter, primarily due to an uptick in C&I lending, the company said. While growth has continued into the third quarter, "we expect that will taper off as we approach the end of the year," Turner said.

Other banks are more optimistic about their loan growth prospects. At Comerica, preliminary data shows that average loans as of Aug. 31 are up about $900 million, or nearly 2%, from the second quarter, according to Farmer.

Meanwhile, Huntington Bancshares in Columbus, Ohio, expects loans in the fourth quarter to increase in the high single-digit range from the same quarter in 2021.

"The first half of the year and quarter-to-date thus far in [the third quarter] have been at or exceeding this level of growth," said Huntington Chief Financial Officer Zachary Wasserman.

— Allissa Kline

Lower demand and market volatility dampens fee-income expectations

Bank executives tempered expectations for fee-income growth during the third quarter, citing market volatility and slowing demand for products and services.

A slowdown in mortgage originations and capital markets disruptions have led Citizens Financial to see "less upside" in fee income, according to CEO Bruce Van Saun. There "could have been some upside this quarter" if not for market turbulence, Van Saun said.

Bank of America and JPMorgan also pointed to the impact of market volatility on investment-banking fees.

While BofA's Moynihan was "optimistic about strength and quality" of the investment-banking team's pipeline, he said markets must stabilize before the bank executes those deals. Moynihan added that investment-banking fees are expected to fall below the $1.1 billion reported for the second quarter.

JPMorgan is forecasting that its investment-banking fees will drop in the third quarter by 45% to 50% from a year ago, according to Chief Operating Officer Daniel Pinto. In response, the nation's largest bank by assets could lay off staffers, he said.

Tim Spence, CEO of Fifth Third Bank, was upbeat about noninterest income during the second half-year. Spence said treasury management fees continue to do "very well" and are outperforming guidance that was revised in July.

Spence added that Fifth Third expects mortgage fees to be "very strong" during the second half of this year, driven not as much by originations and gains on sales but from growth in servicing assets.

— Jordan Stutts