Bank CEOs are thinking less about mergers and more about organic growth as they anticipate a lending rebound this year, according to a new survey.
Out of 49 bank chief executives surveyed by Piper Sandler in February, 77% said that organic growth is their top priority, compared with just 10% who were more focused on M&A.
The latter result was surprising, given many bankers’ past focus on mergers, said Mark Fitzgibbon, Piper Sandler’s head of financial services research, who conducted the survey.
The recent M&A spree has been fueled by bankers seeking to combine to cut costs, achieve greater scale and pool their resources as technology spending becomes more important.
But the volatility of today’s markets, which leads to swings in bank stock prices, “makes it hard to price deals,” Fitzgibbon said. He also noted that a
Market gyrations have been frequent this year, with investors fretting over decades-high inflation levels, looming Federal Reserve interest rate hikes and Russia’s invasion of Ukraine, which has driven oil prices to their highest levels in years.
So at least in February, bank CEOs were focused on getting a large chunk of the anticipated rebound in loan growth. The hope in the industry is that 2022 will mark a turning point after high customer cash balances — and uncertainty about the business climate — weakened loan demand throughout much of the pandemic.
Piper Sandler analysts expect loans to grow by 6.8% on average this year, which is in line with the survey’s results. More than two-thirds of the bank CEOs who were surveyed said they anticipated loans growing by 4% to 7%, and nearly a quarter of them saw loans rising even faster.
Those findings may be “skewed a little bit upward” because the survey weighed the views of CEOs at smaller banks more heavily, Fitzgibbon said, noting that larger institutions likely have more modest projections. He also said that higher oil prices will put “somewhat of a damper” on loan growth expectations.
Bankers who spoke this week at an industry conference sponsored by RBC Capital Markets were largely upbeat about the forecast for loan growth.
U.S. Bancorp Chief Financial Officer Terrance Dolan said the economy remains healthy, with consumer spending and business activity “starting to pick up.” Commercial borrowers have pent-up demand to rebuild their thin inventories and finance capital expenditures, he said.
While geopolitical news has led to some uncertainty, customers’ views of the economy have largely remained “pretty positive,” he said.
Meanwhile, Regions Financial continues to “feel good about our ability to deliver” on loan growth this year, given steady demand for credit, CEO John Turner said at the conference. Still, he said the Ukraine conflict and higher oil prices have made some clients somewhat less confident than they were a few weeks ago.
In the Piper Sandler survey, 27% of bank CEOs listed cybersecurity as their biggest concern for the industry, a surprising result given that bankers “don’t talk about it a lot,” Fitzgibbon said.
The survey was sent out days before Russia invaded Ukraine, but there was already talk at that time about the need to guard against
“These companies must be spending more on cybersecurity than we think” and redirecting savings from cost-cutting initiatives toward bolstering their cyber protections, he said.
Twenty percent of the respondents said they were most concerned about inflation driving up bank expenses, while the remaining CEOs were roughly split evenly between worries about a flatter yield curve, fintech competitors and credit quality deterioration.
Relatively few CEOs expressed concern about the possibility that their loans will start to go sour anytime soon.
Nearly half of those surveyed said they expect credit quality to hold up through at least 2024, while 36% said they didn’t expect credit issues until the second half of 2023. Eleven percent foresaw credit quality turning negative in the first half of 2023, and 4% predicted significant credit deterioration later this year.
