A strong majority of banks expect continued solid balance sheet growth this year — deposits and loans combined — but they also are bracing for credit quality deterioration, suggesting expansion efforts will come with higher risk.
That's according to a Piper Sandler survey of bank CEOs. The firm queried 288 CEOs, and 80 completed the survey. It found that 83% expect balance sheet growth this year. Expectations for
Deposit growth, however, could prove increasingly difficult. Mounting calls from customers for higher interest rates on their deposits, following eight Federal Reserve rate hikes over the past year, is spurring heated competition for funding. This is expected to temper deposit gains this year, according to Mark Fitzgibbon, Piper Sandler's head of research.
The firm's survey, conducted this year and covering banks of all sizes, found 40% of the respondents said they expect their balance sheets to grow up to 4% this year. Another 30% said they expect balance sheets to grow 5-8% and 13% expect them to expand 8% or more. The remainder expect their balance sheets to shrink.
Bankers also expect rising deposit costs to hinder net interest margins this year. More than half of the CEOs surveyed — 57% — said they expect their NIMs to fall this year. Another 18% anticipate their margins will be flat.
The varied outlook "is not surprising, given the liquidity challenges pressuring the industry," Fitzgibbon said.
The
A strong majority of survey respondents said they anticipate nonperforming loans to increase in 2023, with 56% expecting this to happen in the second half of 2023. About 10% see this developing in the first half of the year, with the rest looking for credit deterioration to get pushed to next year or beyond.
"It is clear to us that most [bank CEOs] expect problems to heat up in coming quarters," Fitzgibbon said.
The biggest area of concern was office lending; 40% of the CEOs listed this as the most vulnerable loan category, following a shift to remote work amid the pandemic.
"Office is clearly the area to watch," Donald McCree, head of commercial banking at Citizens Financial Group in Providence, Rhode Island, said in an interview. McCree, who is also vice chairman of the $227 billion-asset bank, said enduring work-from-home trends could galvanize banks to set aside more reserves for potential office loan losses.
Consumer lending worries followed in the Piper Sandler survey, with 21% citing this as the most likely area of weakness. Job losses tend to pile up during recessions, hampering consumers' ability to repay credit cards and other loans.
Recession and credit quality concerns also factored heavily into a merger-and-acquisition
The Piper Sandler survey found 56% of CEOs expect that M&A will remain at similarly low levels through this year. Another 30% see volumes decreasing further in 2023.
John Corbett, CEO of SouthState Corp. in Winter Haven, Florida, said deal activity is bound to fall more this year. The $44 billion-asset company had closed a bank acquisition in
"As we look at it, 2023 M&A is going to be pretty slow for a couple reasons," Corbett said during the bank's earnings call. "Right now, there's just not a lot of clarity as it relates to the regulatory approval process, and there's not a lot of clarity as it relates to potential recession risk."
In total, Fitzgibbon said, banker sentiment is shifting from optimism toward pessimism.
"Without a doubt, the sentiment from the CEO survey was noticeably more negative than we have seen in recent years," Fitzgibbon said. "In general, they seemed to be more cautious on growth, margins, M&A and credit quality."
