Slowdown, CRE, BB&T-SunTrust: What has bankers on edge

May 15, 2019 6:00 AM

“Glum” is one of the first words that Promontory Interfinancial Network, a deposit placement provider based in Arlington, Va., used to describe bankers’ attitudes about the future of the U.S. economy in its most recent Bank Executive Business Outlook Survey.

The quarterly survey, conducted from April 2-12, was distributed by email to bank CEOs, presidents and chief financial officers across the United States. It asked them about a wide range of items including economic outlook, loan demand, deposit competition and funding costs as well as topical issues, such as the potential impact of the BB&T-SunTrust merger deal announced in February. The 453 respondents skewed slightly toward community banks with assets of less than $1 billion, Promontory said in its 22-page report on the results.

The picture was pretty clear: Bankers are less bullish about economic conditions than they were a year ago. Last year, more than half of the bankers surveyed said that economic conditions for their bank would improve in the next 12 months. This year, fewer than 20% made such a prediction. Expectations for loan demand have cooled, too, while commercial real estate lending is emerging as a trouble spot. Bankers in the West and Midwest seemed more downbeat than their peers in other regions.

Two of the study’s gauges of banker attitudes, including its Bank Confidence Index, seemed to rise slightly. But even if attitudes have bottomed out, soft demand for loans and other factors could keep the 100-point indexes below 50 “for the foreseeable future,” report said. The indices have been below 50 for five consecutive quarters.

Meanwhile, though bankers seemed concerned about the more formidable competitor the combined BB&T-SunTrust could become, they were relatively optimistic about consolidation, the acceleration of technology investments and other changes the megadeal could bring. They also embraced the possibilities presented by the expansion of marijuana services businesses in some parts of the country.

Here are our five big takeaways from the results and the accompanying data.

Bankers are ‘increasingly pessimistic’ about economy

Banks’ take on the economy in the past year was fairly positive — but check in with them later in the year, they say, because things could start changing.

Slightly more than half said conditions as of early April were the same as a year earlier. Since first-quarter gross domestic product expanded by 3.2%, the latest reading makes sense, the Promontory Interfinancial report says.

However, when you ask bankers to look ahead, they were “increasingly pessimistic” than they were a year earlier and even in early January. Just 17% of bankers said economic conditions for their bank would improve in the next 12 months, compared with 22% in January and 55% in the spring of 2018.

Bankers in the West and Midwest offer more sour outlooks than their peers elsewhere. In the West, 51% said they expect overall economic conditions to worsen in the coming 12 months, and only 9% predict improvement. Those splits in the Midwest were only slightly better, 41% and 12%.

Bankers in the South were a little more upbeat, with 26% forecasting improvement and 51% expecting conditions to remain the same. In the Northeast, 20% said they expect improvement, and 52% said things would be steady as they go.

Among community banks, executives at institutions with assets below $1 billion were more upbeat. In that group, 18% expect conditions to improve and 33% expect them to worsen. Fewer banks with assets of $1 billion to $10 billion expect improvement (11%), and more expect a worsening (44%). However, everything is relative: That 44% pessimistic figure fell from 60% in the fourth-quarter survey.

Loan-demand expectations cool for the year ahead

Ever feel like the outlook on loan demand changes every time you ask in recent months, as in rosy one day, and bleak the other?

Well, when bankers were queried in early April, a week or two after the close of the first quarter, they had gone in the bearish direction.

When asked to compare current conditions against the conditions 12 months earlier, 60% said they were the same or worse. Regarding the 12 months ahead, 36% predicted improvement, 31% forecast worsening conditions and 33% said they expected the status quo. That was a big shift from the same point last year, when 53% had predicted improvement on loan demand.

Expectations differed by region and bank size.

Forty-two percent of lenders in the West expect demand to worsen in the next 12 months, and Midwestern bankers were split evenly on where things are headed. However, more than four in 10 bankers in the South (41%) and in the Northeast (45%) forecast improvement. (See chart above.)

Among banks with less than $1 billion of assets, 38% said they expect improvement and 30% said demand would fall. Banks with $1 billion to $10 billion of assets were more pessimistic, with only 27% predicting improvement and 35% anticipating a drop.

CRE is biggest red flag among lenders

What is the loan category that’s keeping lenders up at night? Hands down, it’s commercial real estate.

Forecasting when the next recession is supposed to hit has almost become a sport in the last six to nine months. Late 2019? 2020? Later? This survey didn’t seek to nail down banker expectations of the when, but it did ask about the what: If the downturn happened later this year, which of these four types of lending — CRE, commercial and industrial, home mortgages and consumer — would represent the biggest credit exposure for them?

The survey did not explore why CRE is expected to be the biggest landmine, but it's not surprising given the big development boom in many major cities, the fear of an inevitable downturn, intense competition among bank and nonbank lenders and rising delinquencies. Banks seem to be embracing commercial and industrial loans instead, according first-quarter data on loan growth.

Promontory’s report made an interesting observation, too: “Given the importance of the home mortgage industry in the 2008 financial crisis, it is interesting to note that only 8% of bankers saw that as the biggest potential risk."

Bankers realistic about many changes BB&T-SunTrust merger could bring, but ...

Well, it wasn’t exactly bring it on, but neither was it fear and loathing.

Three months after the announcement of the biggest bank M&A deal since the financial crisis, speculation about the impact the combination of BB&T in Winston-Salem, N.C., and SunTrust Banks in Atlanta continues to provide grist for seemingly endless conversations.

Roughly half of survey respondents welcomed the accelerated investments in technology and increased consolidation the deal could stimulate. The negative reaction to those likely trends was confined to fewer than a third of respondents. And about 45% said the heightened focus on efficiency in the industry that the deal might force would be a good thing.

However, reactions were more mixed about facing a potentially more formidable competitor — 37% reacted negatively to that prospect, 35% were OK with it and 28% were neutral.

Pot business is too legit to ignore, banks say overwhelmingly

When it comes to pot, the ayes have it — by a lot.

Now that marijuana has been made fully or partially legal in 33 states and District of Columbia, many growers and stores need banking services for business and security reasons. However, it’s still a controlled substance under federal law, so many bankers are worried about violating federal law as well running afoul of anti-money-laundering and other regulations.

Results of the Promontory survey suggest bankers would welcome a policy fix to foster a new niche business line — 82% said banks should be able to serve businesses that sell marijuana. Support was strongest in the West (89%) and the Midwest (85%), but even three in four bankers in the South — where the legal changes have been much more limited — were in favor.