In the full year guidance for loan growth provided at the beginning of the year, many banks had an assumption that loan demand and loan growth would increase in the second half of the year as interest rates declined. With rates expected to remain relatively high for the remainder of the year, investors and analysts will want to understand if banks are now expecting a lower level of loan growth in 2024 than initially expected. To the extent possible, banks should provide insight into the trends that are impacting loan growth
and whether new loan production is less than expected or just not enough to offset greater than expected levels of payoffs and declining utilization rates on credit lines due to the higher rates.
With the Fed holding rates steady, some banks have indicated that they have been able to reduce deposit rates in certain areas without seeing deposit outflows. Investors and analysts will be interested in hearing if banks believe that they are in a position to start reducing rates on deposits or if the level of deposit pricing competition they are seeing in their markets prevents them from being able to reduce rates yet without losing clients.
As has been the case for several quarters, there will be a great deal of interest in the trends that banks are seeing in credit quality and any increases they are seeing in net charge-offs and migration into criticized/classified assets. In some cases, banks have indicated they have not seen any systemic issues within their portfolios, but have seen the emergence of some larger problem credits that they categorize as being idiosyncratic. It’s likely that the focus of investors and analysts will continue to be on areas of concern such as central business district office CRE, multifamily (particularly rent-controlled properties), syndicated loans, SBA loans, equipment leases, small business loans, and subprime consumer loans. They will also be interested in understanding if an increase in the allowance level is being driven by specific trends in the portfolio or if it is related to the bank being prudent and increasing its reserves to reflect broader economic conditions.
Reports have indicated that regulators are telling banks that have higher CRE concentrations in their loan portfolio that they need to hold more capital. Investors and analysts will be interested in hearing if a bank has been told that it needs to hold more capital, and if so, how that impacts their ability to utilize capital for other purposes like repurchasing shares, increasing the dividend, supporting balance sheet growth, and making acquisitions.
Over the past several quarters, some banks have executed on strategies to reposition their balance sheets. With the higher-for-longer rate environment appearing more likely, investors and analysts will be interested in hearing if more banks are now planning to execute on similar strategies to help manage through the current environment and if banks that have already executed on these strategies are considering taking additional actions. Among the strategies they will be interested in hearing about are selling lower-yielding investment securities and/or selling or winding down lower-yielding or higher-risk loan portfolios and using the proceeds from the sales or the loan payoffs to fund new loan production at higher rates, the purchase of new investment securities at higher rates, or the reduction of higher cost funding sources, all of which would be accretive to net interest margin and earnings.
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