Fallout from a surge in interest rates and the spate of regional bank failures created a
Costs are rising. Credit quality is bound to deteriorate. Loan growth is slowing alongside an economy that shows signs of easing. Earnings are bound to take hits following robust results over the past couple of years.
But most banks are
Such is the view of Frank Sorrentino, the long-time CEO of ConnectOne Bancorp in Englewood Cliffs, New Jersey. With nearly $10 billion of assets and a presence in major markets from New York City to South Florida, ConnectOne is among the nation's largest community banks and a bellwether for the industry ahead of the looming second-quarter earnings season.
Following 10 Federal Reserve rate hikes to tamp down inflation — policymakers held their benchmark rate steady this week but signaled future increases are in the cards — borrowing costs are up
Not surprisingly, Sorrentino said in an interview this week, loan demand "is down dramatically." He said that lenders, too, are more selective about whom they extend credit to, taking extra care to avoid sectors or clients vulnerable to a downturn.
Still, Sorrentino said, the consumer-driven economy, while slowing, remains solid on a foundation of ultra-low unemployment, and sizable pockets of loan demand are likely to remain intact through 2023.
"We're in a slower economy, [but] I don't think we go into a recession," Sorrentino said. Almost "everybody has a job, has money in the bank. Credit is available. Yes, it is pricier, but it is available."
He said a housing shortage continues to drive an outsize need for homebuilding — and construction loans — and the U.S. manufacturing sector appears at the onset of a renaissance as American companies curb their reliance on overseas materials following supply-chain snarls that emerged amid the pandemic.
While big technology companies may be in the midst of cost-cutting rounds after expanding too aggressively in recent years, Sorrentino said demand for advancing tech is entrenched in American life and will continue to drive innovation and lending opportunities. He cited artificial intelligence, vehicle electrification and decarbonization programs in the energy sector as key examples.
"So we still see a lot of opportunity," Sorrentino said.
Bank stocks have recovered some ground after steep losses following the demise of Silicon Valley Bank, Signature Bank and First Republic Bank. But investors remain cautious and eager for encouraging reports from bankers.
"The panic that gripped bank stocks between March and April certainly feels as if it is a thing of the past. Obviously, that is terrific," said Piper Sandler analyst Scott Siefers. "Unfortunately, the damage that it left in its wake could still take a very long time to sort itself out."
Credit quality, meanwhile, is bound to weaken some, though from nearly perfect conditions, Sorrentino said. Consumer and business clients were flush with extra cash after the depths of the pandemic in part due to government stimulus programs. This bolstered borrowers' ability to repay loans and kept banks' losses to near zero, he said.
That is bound to change, but Sorrentino thinks credit losses are likely to only tick up and return to normalized levels. Most banks, he said, are well-capitalized and well-reserved for historically average losses.
"We'll have to see some level of credit deterioration," Sorrentino said. "But I don't think it's going to be terrible at all."
To be sure, he added, funding costs are rising in the aftermath of the failures this spring as the downfalls were hastened by deposit runs. This amplified the already intensifying competition for deposits amid rising rates.
But Sorrentino said well-managed banks planned long ago for the inevitable increase in rates. To be sure, the Fed moved with more haste than many bankers anticipated. But he said that, after years of strong interest income on loans, banks can weather the storm — at least barring an even more aggressive strategy from the Fed in coming months.
On the M&A front, he said, deal activity is all but sure to rebound amid community and regional banks' secular push for greater size, geographic reach and business line diversity. It is a matter of clarity on the direction of the economy. Once buyers can gauge the depth of any downturn, they can assess sellers' loan books with more confidence. When they can conduct due diligence confidently, buyers are likely to jump back into the M&A arena, he said.
"I actually think M&A is going to pick up soon — yet this year — because all the drivers of consolidation are still going to be true," he said.
