The question investors and analysts want banks to address this earnings season is: How much longer will they run in place on loans and revenue?
"Main Street still isn't borrowing. We are on a treadmill," says David Dietze, chief investment officer of Point View Financial Services Inc. in Summit, N.J. "Is this the new normal? And how long is this going to last?"
Large and midsize banks begin reporting second-quarter results next week, starting with JPMorgan Chase & Co. on Thursday. Market watchers expect another stretch of static loan and revenue growth. Overall earnings could be higher from the industry's reclassifying as profits the big pools of funds set aside to absorb losses.
That was the story in the two previous quarters. If executives expect those trends to continue indefinitely, then market watchers will want to find out how the companies plan to stay in the black.
Terry McEvoy, an analyst with Oppenheimer & Co. Inc., says he wants to "hear some concrete signs that the pipeline is building" in business or consumer lending. If they are not, he said, that could mean deep cuts are on the way.
"The areas that banks can control are their operating expenses, their employees and branches," McEvoy says.
Expense control is one solution to the double hit of low interest rates and tepid loan demand. Low rates means banks cannot reduce deposit rates any further. Fewer loans mean less loan income, particularly with problem construction and home loans running off the books.
Something has to give. The Federal Reserve has indicated short-term rates will stay low through next year. The further away loan demand is, the sooner banks will have to make the tough choices. Layoffs and branch closings reduce expenses, which in turn improves profits. So do cost savings from mergers.
Margin-sustaining options include shrinking the balance sheet, running off deposits and investing in higher-yielding — and riskier — securities.
Just about every big bank has to deal with margin contraction. Analysts are forecasting lower net interest margin at U.S. Bancorp, PNC Financial Services Group Inc. and Fifth Third Bancorp, among others.
There are other concerns.
The biggest banks are most vulnerable to global volatility. Mergers and trading slowed last quarter because of turmoil in the U.S., Europe and Asia. Market watchers are eager to learn how severely this hurt results at JPMorgan Chase, Bank of America Corp., and Citigroup Inc. All three have big investment banks.
Three potential bright spots for that group are credit cards, home mortgage refinancings and business loans that do not involve real estate, such as revolving credit and capital equipment loans.
Another big question is whether loan growth slowed or accelerated at the handful of institutions that have managed to put more business or consumer loans on their books in recent quarters. Those included M&T Bank Corp., U.S. Bancorp, Huntington Bancshares Inc. and Cullen/Frost Bankers Inc.
Recent weekly Fed data on lending showed an uptick in commercial and industrial loans that could translate to a modest quarter-to-quarter increase. Expectations are high that those institutions benefited from that trend.
Another question: Did continuing runoff of commercial mortgages and business construction loans squash overall loan growth at aggressive business lenders such as Comerica Inc. and Fifth Third? Loan runoff exceeded loan growth at both companies in the first quarter, partly as a result of a surge of large corporate borrowers' repayment of bank debt after tapping the capital markets. Analysts want to know whether that trend continued through the second quarter.
Results are expected to vary.
Higher expenses at U.S. Bancorp are expected to have offset higher corporate payment and merchant processing fees, keeping pre-provision profits static. Analysts expect that net interest income contracted on slower loan growth and increased securities purchases.
Low interest rates and falling fee income are expected to have weighed on PNC. The Pittsburgh company's first-quarter revenue benefited from recoveries of insurance claims and private-equity gains. A lack of those one-time gains could hurt quarter-to-quarter results.
Profits at BB&T Corp. of Winston-Salem, N.C., likely were buoyed by seasonal factors, analysts say. BB&T also likely benefited from progress working through nonperforming loans.
Low rates and overall contraction of loans hurt spread income at Fifth Third, analysts say. But expense cuts and higher mortgage refinancing fees may have acted as a counterbalance.
