January 27, 2017

Loan Growth Opportunities in 2017

EXCERPT: Loan growth for banks is falling across the board. Year over year, the loan growth rate has decreased to 6.1%, the slowest rate recorded in 27 months. Despite the slowing climate, however, some regional banks are finding their way by concentrating on certain loan types or expecting their portfolios to reprice as interest rates go higher.

Loan growth for banks across the board is falling. Year over year, the loan growth rate has decreased to 6.1%. That's the slowest growth rate for loans recorded in 27 months.

Bank loan growth has slowed.

Loan growth is also slowing by type of loan. Real estate loans, for example, are rising at the slowest rate in 10 months. Commercial and industrial (C&I) loans are doing even more poorly, growing at the slowest rate in three years.

Overall, consumer loans have been slowing for the past six months.

Three Banks, Three Different Stories

So are bank earnings going to be uniformly dismal going forward? Loans are the biggest earnings assets banks have. Will bank earnings be flat or fall across the board?

Banks approach their loan portfolios with varied strategies. While the slowing climate for loan growth may create some uncertainty for banks, they can find their way by lending to strong regional markets or expecting their portfolios to reprice as interest rates go higher.

Georgia-based Synovus cut its exposure to commercial real estate (CRE) and construction loans after the financial crisis of 2008-2009. Synovus turned to C&I lending to health care and doing equipment financing.

In its most recent quarter, that pattern continued. C&I loans grew 7% for the year. CRE lending dropped 0.4%. For all of 2017, Synovus forecasts loan growth of 5%-7%.

The shift in the loan mix has boosted yields, by roughly 30 basis points for the quarter.

Bank of the Ozarks

A very different strategy worked for Bank of the Ozarks. The company recently gave guidance that it expects 57% of overall loan growth to stem from CRE. As of the end of September, the bank registered a ratio of CRE-to-total risk-based capital of 391%, above the 300% established by regulators.

Chief executive officer and chair George Gleason, however, maintained that the bank was comfortable with the existing ratio, and in fact expected it to rise. Gleason said that Bank of the Ozarks was "the lowest-risk CRE lender in the country," according to American Banker.

CRE is a growth area for some regionals.

Dallas-based Comerica, however, expressed confidence not so much in any particular type of loan as in the overall environment for rising interest rates.

Comerica's overall loan portfolio fell roughly 1% on the year, largely as a result of its pursuing fewer loans to the energy sector.

The bank does expect growth in mortgages and auto lending in the coming year, and is forecasting loan growth in line with GDP, at about 2%.

However, bank officials expressed confidence that net interest income would rise as a result of climbing interest rates. The Federal Open Market Committee has indicated it expects to hike rates several times over the next year. David Duprey, Comerica's chief financial officer, noted "over 90% of our loans are floating-rate. Therefore, as rates move, our loan portfolio reprices relatively quickly." The bank expects net interest income to climb by roughly $70 million over the next year.
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