Banks – Q3 2021 Earnings Season Themes

Loan demand: During the first half of the year, management teams spoke positively about loan demand increasing as the economy recovered from the effects of the pandemic. However, during the third quarter, we saw the resurgence of new COVID cases resulting from the Delta variant with certain areas of the country being hit harder than others. Accordingly, analysts and investors will want to understand how the COVID resurgence has impacted loan demand at individual banks and if clients are now delaying plans to make investments and increase debt utilization.

Commercial loan growth: Real estate related lending has picked up faster than commercial lending, which continues to be impacted by high levels of liquidity among businesses and uncertainty regarding the pace and strength of the economic recovery. Banks should be prepared to talk about the trends they are seeing in commercial loan demand and if utilization rates are showing any signs of increasing. Any niche areas of commercial lending where demand has picked up faster should be highlighted.

Deposits: While eager to see excess funding deployed, investors and analysts are also interested in understanding the true stickiness of the new deposits that banks pulled in over the past two years as consumers and corporations conserved cash and small businesses built their own cushions with Paycheck Protection Program loans. And if banks now believe these deposits to be sticky, there will be interest around any changes they are making in their approach to redeploying that liquidity.

Net interest margins: With excess liquidity and modest loan growth compounding challenges posed by a protracted period of low interest rates, NIMs remain under pressure. However, higher levels of loan growth could begin to ease that burden. At the same time, the Federal Reserve appears poised to begin tapering $120 billion in monthly bond purchases. This could mark the beginning of an eventual rise in interest rates that should be favorable for expanding net interest margins. With that possibility, investors and analysts will look for color on banks’ efforts to reposition their balance sheets to increase asset sensitivity.

Fee income: Given the challenges in generating growth in net interest income in the current environment, many banks have actively worked to grow business lines that generate noninterest income, while others have acquired fee generating operations. Investors and analysts will be interested to hear about progress on both fronts. They will also look for commentary on whether new fee income can be sustained and if banks are continuing to pursue new avenues of noninterest income growth.

Mortgage banking: One major bright spot amid much of the pandemic – residential mortgages – could prove to be something of a wildcard in the second half of 2021. Home loan originations were an important source of fee income in recent quarters, driven by refinancing activity. But refi activity in recent months has been choppy along with long-term rates. Home buying, meanwhile, has been constrained by limited housing supply and soaring prices. Investors and analysts will want color on mortgage demand, trends in gain-on-sale margins, and any reduction in expenses that banks are making to offset declining production volumes.

Mergers and acquisitions: Bank M&A activity accelerated over the spring and summer months, as buyers regained confidence in their ability to conduct due diligence on targets’ loan books. In a challenging environment for organic growth, banks are increasingly looking at M&A to help them achieve the scale and efficiencies that will drive earnings growth and absorb the investments required to continue upgrading technology platforms. S&P Global data show there were 116 bank acquisitions announced over the first seven months of the year, up from 111 over all of 2020. With the pace of deal activity accelerating, banks should be prepared to discuss how M&A fits into their current strategies and how it may affect competition in their markets.

Talent and technology: With loan demand remaining modest, many banks have aggressively pursued new banking talent as a means to drive loan growth. At the same time, banks continue to invest heavily in new digital services and products – and the skilled employees needed to manage the more complex technology platforms — as the pandemic hastened the shift away from branch banking to online and mobile financial services. Investors and analysts will want to know the impact of these efforts on expenses, both in terms of new hires and pressure being seen on compensation in order to retain key personnel.