Loan growth, fee squeeze and more: Takeaways from 1Q earnings

At this time two years ago, the U.S. banking industry hit an inflection point. Lockdowns during the early days of the COVID-19 pandemic caused soaring unemployment and fears that loan losses were about to skyrocket.

Loan volumes suffered as the federal government sent massive amounts of aid to households and businesses. And banks leaned on fee income to compensate for sagging loan margins.

Now, at the end of the first quarter of 2022, the industry has again been turned upside down.

Commercial loan growth has finally arrived. As the Federal Reserve hikes interest rates, loan margins have been widening.

Increased interest income would boost banks’ lending profitability, but inflation and mounting expenses, along with the specter of potential recession, loom large.

April 1
Net interest income

But fee income has started weakening, led by a sagging mortgage market. And after spending much of the last two years releasing reserves they squirreled away at the start of the pandemic, some banks have again reversed course in the face of high inflation and the war in Ukraine.

What follows is a look at five key themes that have emerged since April 13, when banks started reporting their first-quarter earnings.

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Bloomberg

Commercial loan growth accelerates

Throughout much of the pandemic, commercial lending remained stalled. Businesses were benefiting from government stimulus payments, and they were cautious about making new investments at a time of great economic uncertainty.

During the first quarter, the long-awaited resumption of commercial loan growth finally arrived. Inflation, increased business activity, previously deferred investments and slowing paydowns of existing debt were among the factors that contributed to the pickup, according to bankers.

At San Francisco-based Wells Fargo, average commercial loans rose by 5.3% from the fourth quarter of last year. The same metric climbed by 8% at Minneapolis-based U.S. Bancorp.

As businesses grapple with higher salary expenses and labor shortages, they are investing in technology to create efficiencies, according to U.S. Bancorp Chief Financial Officer Terry Dolan.

“At least in the near term, capital expenditure will continue to be reasonably strong,” Dolan said in an April 14 interview.

Numerous other large banks reported linked-quarter commercial loan growth, including JPMorgan Chase, Citigroup and PNC Financial Services Group.

The industrywide picture in consumer lending, where pandemic-era government stimulus payments also led to reduced borrower demand, was more mixed during the first quarter.

JPMorgan and Wells both posted declines in consumer loans, and Fifth Third Bancorp in Cincinnati tempered its 2022 outlook on the consumer side.

On the other hand, M&T Bank in Buffalo, New York, projected full-year consumer loan growth of 7% to 9% through the end of 2022.

And Bank of America, which reported 4% growth in consumer loans, projected that loan demand will remain solid throughout the rest of year as Americans continue to spending the savings they accumulated earlier in the pandemic.
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Fees get squeezed

Fee income came under pressure during the first quarter as several companies grappled with market volatility that disrupted activity in areas such as investment banking and residential mortgage lending.

Russia’s war in Ukraine, combined with the possibility that the Fed will raise interest rates six more times this year, contributed to the decline, which caught several companies by surprise.

At Charlotte, North Carolina-based Truist Financial, noninterest income dropped 2.5% compared with the year-ago quarter, and it would have fallen further were it not for a double-digit increase in insurance-related fees, Truist executives told analysts. At Regions Financial, the year-over-year decline was even steeper — 8.9% — as the Birmingham, Alabama, company reported a reduction in capital markets, mortgage and bank-owned life insurance income.

Following the declines, some banks revised their full-year fee income guidance. Citizens Financial Group in Providence, Rhode Island, expects full-year fee income to rise by 3%-7% — about $100 million less than what it forecast in January. Fifth Third now expects fee income to be flat to down 1% for the year.
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Mortgage revenues, in particular, take a hit

Mortgage volumes across the banking industry were hit hard by rising interest rates during the first quarter.

Mortgage rates climbed from under 3% last summer to over 5% early this month. With more Fed rate hikes expected, the Mortgage Bankers Association is projecting a 36% drop in loan origination volumes this year.

Huntington Bancshares in Columbus, Ohio, reported that its mortgage revenues fell by 51% compared with the first quarter of last year. At Cleveland-based KeyCorp, consumer mortgage income fell by 55% year over year.

Other banks that reported steep declines in their home loan businesses included Dallas-based Comerica and Detroit-based Ally Financial.

One exception to the trend was First Republic Bank, which leans heavily on affluent customers, and which got about half of its record-setting loan originations during the quarter from its mortgage business.

But even at First Republic, there were questions about how much longer the good times will continue. The San Francisco bank said that it benefited during the quarter from increased refinancings by borrowers who were hoping to lock in low rates at the last minute.
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Bloomberg

Credit quality remains pristine — for now

Bankers said they saw little sign of trouble in their loan portfolios during the first quarter.

“The consumer has money. They pay down credit card debt,” JPMorgan CEO Jamie Dimon told analysts. “Businesses are in good shape. Home prices are up. Credit is extraordinarily good.”

The “underlying economy is really good,” said Steve Steinour, the CEO of Columbus, Ohio-based Huntington. “We could be wrong, but we’re bullish about 2022, and we’re not calling for a recession in 2023 or 2024 at this stage.”

Overall, credit performance “remained strong” at large banks during the quarter, despite some increases in credit card losses that reflect normalization to prepandemic trends, Fitch Ratings said in a press release.

Auto loan delinquencies at major banks are halfway back to 2019 levels after bottoming out last year, analysts at Moody’s Investors Service wrote. The federal government’s moratorium on student loan repayments is continuing to help consumer loan quality, but credit will “continue to deteriorate as consumer support measures wane,” they wrote.

Bankers are also eyeing their commercial portfolios for potential issues, but so far aren’t seeing much cause for concern.

Rather than charging off commercial loans, for example, Wells Fargo recorded $29 billion in net recoveries in the first quarter.

Executives at Columbus, Georgia-based Synovus Financial said they didn’t see major signs of trouble for small businesses this year. But they did caution that inflation and supply-chain issues are a challenge for smaller businesses and may cause some borrowers to fall behind on their loan payments.

“Over time, they don't have the leverage that their larger counterparts have relative to input cost and supplier negotiation,” Bob Derrick, chief credit officer at the $56.4 billion-asset bank, told analysts.
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Banks split on building loss reserves

Banks spent nearly two years in a lockstep approach to reserving during the COVID-19 pandemic. First came a period of reserve building, followed by several quarters of releases.

But banks began to diverge in the first quarter, with some adding to their cushions because of the economic uncertainty and others continuing to release capital due to their confidence in borrowers’ ability to weather what’s ahead.

In calls with analysts, some industry executives laid out concerns that the Fed may be unable to rein in rising inflation without causing a recession. They also voiced worry about the possibility that essentially sealing off the Russian economy with sanctions may cause severe economic fallout.

“Those are storm clouds on the horizon that may disappear, they may not,” Dimon said during an April 13 call with analysts.

JPMorgan recorded a $902 million addition to its credit reserves, its first buildup since the middle of 2020. Ally added $167 million to its reserve for credit losses, and First Republic recorded a $10 million provision.

But not every bank followed suit. Wells Fargo, for instance, released about $1.1 billion from its reserves, largely because of “less uncertainty around the economic impact of COVID.”

Bank of America released $362 million of reserves, with company executives saying they were confident about borrowers’ ability to repay their loans through the year. Citi released net reserves of $612 million, the smallest amount since the third quarter of 2020.

Citi said it has stress-tested for potential losses from its remaining exposure to Russia. And CEO Jane Fraser said during the bank’s April 14 earnings call that executives felt good about releasing reserves because Citi was previously slower than others to do so.

“We were comfortable that this quarter, that was the appropriate thing to do, given the state of COVID and the U.S. economy,” she said.
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