Banks – Q2 2021 Earnings Season Themes

Loan growth: Management teams have consistently indicated an expectation for stronger loan growth in the second half of 2021. As banks report Q2 earnings, where continued modest loan growth trends are anticipated, investors and analysts will be looking for commentary on trends in loan production, pipelines and credit line utilization rates to determine if expectations for the second half of the year have changed at all. They will also be looking for color on any particular areas of lending where demand is accelerating faster than other asset classes.
Net interest margins: The excess liquidity throughout the banking industry has pressured net interest margins. With an expectation of stronger loan growth, investors and analysts will be interested in seeing which banks are now in a position to favorably remix their balance sheet toward higher-yielding earnings assets and reduce the pressure on or even start expanding their net interest margins. They will also be looking for commentary on any balance sheet repositioning efforts being made to increase asset sensitivity in light of the expectation for an eventual rise in interest rates.
Mergers and acquisitions: After a lull in 2020 amid the economic uncertainty created by the pandemic, M&A activity is ramping back up this year. There were at least 60 bank acquisitions announced during the second quarter, according to S&P Global data, up from 35 in the first quarter and well above the 10 deals announced in the second quarter of 2020. Given the pickup in deal activity, banks should be prepared to talk about how M&A fits into their current strategy and how they are positioned to possibly benefit from disruption occurring in their markets from transactions in process.
Hiring trends: Given the muted loan demand during the first half of 2021, management teams have increasingly pointed to the addition of new banking talent as a key factor in generating loan growth. Investors and analysts are interested in hearing about how successful banks are in adding new talent, how quickly new additions are contributing to loan production and any goals for adding more bankers in the second half of the year. With the environment for attracting proven bankers highly competitive, there will also be interest in how new hires are impacting expense levels.
Technology investments: The pandemic accelerated the already rapid shift from traditional branches to digital banking and increased the level of investor interest in understanding technology investment strategies. Investors want to understand where technology spend is focused, the timeline for rollouts of new platforms or services, anticipated benefits in terms of either improved efficiencies or revenue generation and how expense levels are being impacted. While still very early in terms of its adoption, more banks are also announcing plans to offer cryptocurrency-related products and services, which could lead to questions for other banks regarding their level of interest in competing in this area.
Fee income: With ultra-low interest rates and low loan demand presenting challenges for growing net interest income, non-interest income has become an increasingly important component of banks’ revenue mix. Several banks have announced acquisitions this year of asset managers, insurance firms and other businesses to bolster fee income, while others are making investments to grow existing fee-generating business units. Investors and analysts will be interested in hearing about any initiatives that banks have in place to generate more fee income.
Mortgage production: Banks’ residential mortgage operations have proven to be key drivers of fee income and loan growth amid the pandemic. But after several quarters of robust activity, analysts anticipate a slowdown as mortgage rates have increased, refinance applications have declined and limited housing supply and rapidly rising prices are impacting purchase activity in the traditionally strong housing season. For banks that have residential mortgage operations, investors and analysts will want to understand current trends in loan demand, any pressure being seen in gain-on-sale margins, and if lower loan demand is being partially offset by the addition of new mortgage originators.
Credit quality: While overall concern about credit quality has declined in recent quarters, investors will want to understand the rate of improvement in asset classes that are taking longer to recover from the pandemic, such as hotel/motels and retail commercial real estate. They will also be interested in hearing management’s thoughts on the longer-term impact that increased remote working might have on their office CRE portfolios.
COVID resurgence: The emergence of the highly contagious Delta variant has thrown a potential wrench into the re-opening of the economy in certain geographies. Banks should be prepared to speak to how significantly their markets are being impacted by the Delta variant and if there is the possibility of renewed operating restrictions on businesses to control the spread.