Banks – Q4 2021 Earnings Season Themes

Fourth quarter earnings releases and conference calls take on greater importance as they help to set expectations for the coming year and establish strategic priorities. Entering 2022, we believe investors are favoring banks that are positioned to drive above average loan growth, see an outsized benefit from rising interest rates, and have differentiated technology platforms and/or fintech partnerships. With that in mind, here are the earnings season themes for Q4 2021:

Loan Growth: Average loan balances across the industry were flattish in the third quarter, following declines earlier in the year. But management teams increasingly trumpeted strong pipelines in the second half of 2021, signaling notable loan growth could emerge with fourth quarter results. Investors and analysts will look for commentary on trends in loan production and credit line utilization rates as well as insight on which asset classes or geographies are generating the greatest levels of growth. For 2022, banks should be prepared to provide commentary on the expected drivers of loan growth outside of general economic activity, including entry into new markets, the hiring of new banking talent, and the expansion of niche lending businesses or teams focused on high growth industries.

Omicron: The highly contagious Omicron variant of the coronavirus recently emerged as a wild card that could interrupt economic activity and, at least temporarily, impact loan demand. Early data from South Africa, where the new variant first spread widely before arriving in the United States, suggest Omicron does not cause the level of severe illness that Delta and other prior forms of the virus have inflicted, but it is spreading rapidly. Banks should be ready to address any impacts on their markets, including the performance of hospitality-related credits in their portfolios, as well as any new restrictions designed to limit transmission of the virus.

Net interest margins: Banks are flush with liquidity, a reflection of increased saving levels during the pandemic. Absent strong loan demand, banks have struggled to deploy that funding and net interest margins have been squeezed as a result. However, with U.S. inflation rates hovering around three- decade highs during the fourth quarter, bankers increasingly anticipate Federal Reserve policymakers will raise interest rates in 2022 to help control inflation. Higher rates in concert with increased loan demand would help banks expand their margins in the year ahead. Investors and analysts will be interested to see which banks are now in a position to favorably remix their balance sheets toward higher-yielding earning assets and how quickly the shift is expected to occur.

Asset Sensitivity: With the prospect of rising interest rates, investors and analysts are highly focused on the level of asset sensitivity at banks. As a starting point, many of them will go back to look at deposit betas and asset sensitivity during the last cycle of rate increases. Since that time, many banks have made significant changes to the composition of their balance sheets that have made them more asset sensitive. Banks should take the opportunity to highlight the favorable changes, including increases in the percentage of noninterest-bearing deposits, reduction in the percentage of time deposits, and increases in the percentage of variable rate loans. Disclosure on floors on variable rate loans and how many rate increases will be required to move a meaningful amount of those loans above their floors will also be helpful.

Mergers and acquisitions: M&A activity rebounded in 2021. Through the first 11 months of the year, there were 201 bank acquisitions announced, according to S&P Global data. That was up from 111 in all of 2020, when dealmaking stalled amid the initial fallout from the pandemic. However, regulatory approvals of several larger deals were delayed during 2021, as the Fed and other agencies grappled with staffing shortages caused by the pandemic and a White House executive order to ramp up scrutiny of acquisitions. Banks should be prepared to discuss how M&A fits into their current strategy, and if it does, to field questions about the regulatory approval process.

Technology Investments: Interest around technology investment strategies and roadmaps continues to increase. Investors and analysts are looking for color on new digital banking initiatives, timelines of new platforms or services, fintech partnerships, expected revenue generation or efficiency improvements, and impacts to expense levels.

Loan Loss Reserves: Most banks have started the process of bringing loan loss reserves back down toward pre-pandemic levels. For banks that have adopted CECL, investors and analysts want to know when management teams expect to return to “CECL Day One” reserve levels, and if that level is still appropriate given longer-term concerns around pockets of commercial real estate – notably office properties – that could face lasting challenges caused by increased levels of remote work.