Banks – Q1 2022 Earnings Season Themes

Loan Growth: Loan demand increased in the second half of 2021, driven by an expanding U.S. economy and the fading impact of the coronavirus pandemic, with management teams citing strength in both commercial and commercial real estate lending. However, since the start of the year, inflationary pressures intensified and have since been amplified by the Russian invasion of Ukraine. Inflation reached a four-decade high during the first quarter with energy and food costs spiking. Accordingly, analysts and investors will want to understand how these macroeconomic and geopolitical concerns are impacting loan demand at individual banks and possibly changing expectations for loan growth in 2022.

Net Interest Margins: As expected, the Federal Reserve raised its benchmark interest rate by 25 basis points in March. Fed Chairman Jerome Powell said the increase could mark the first of seven hikes this year. At the beginning of the year, many banks indicated that they did not expect to have to raise rates on deposits for at least the first two increases from the Fed. With most banks reporting first quarter results at least a month after the 25 basis point increase in March, analysts and investors will want to hear about any changes in deposit pricing since then and if the expectations for low deposit betas are holding true. They will also be interested in hearing if the rate increase has had any impact on new loan pricing or if the impact of banks eager to put excess liquidity to work is still putting pressure on the average yield on new loan originations.

Credit Quality: While concerns about the impact of the pandemic have abated, a number of new issues have emerged – high inflation, rising interest rates, geopolitical uncertainty, the possibility of a recession in 2023 – that will put focus back on asset quality. Banks should be prepared to speak to which areas of their portfolios might be impacted by these new issues and if they see a need to add to allowance levels again after steadily releasing the reserves built up during the pandemic.

Morgtage Banking: Home loan originations – most notably refinancing activity – proved an important source of fee income for much of 2020 and 2021. That, however, is changing alongside the evolving rate environment. Even before the Fed hike in March, mortgage rates had begun to rise. They are widely expected to continue climbing, further slowing refi demand as well as home buying. Limited housing supply and elevated prices also are hampering homebuying activity. The result: banks’ mortgage revenue is under pressure and is likely to remain so in the coming months. 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.

Expenses: At the start of the year, most banks guided to higher expense levels in 2022 resulting from the tight labor market and the need to increase investment in technology. Since then, inflationary pressures have increased and banks will need to be prepared to speak to any change in expectations for expense levels this year and any levers they are pulling to help manage expense growth.

Mergers and Acquisitions: After accelerating in 2021, bank M&A activity continued at a solid pace to start 2022. There were 47 deals announced during the first quarter of 2022, compared to 36 in the first quarter of 2021. Analysts and investors will be interested in hearing about how inflationary pressures impacting both labor costs and technology investments, as well as headwinds to many sources of fee income – such as mortgage banking – are impacting the acquisition landscape and potentially turning more banks into sellers.