Bank Q4 earnings themes: Managing expectations for an uncertain future

2023 Outlook and Forecasts

Many banks typically use the fourth quarter earnings calls to set expectations and provide targets for various financial metrics for the coming year. However, given the economic uncertainty and the possibility that the economic and interest rate environment could be very different in the second half of the year than the first half of the year, setting expectations and providing targets for 2023 will be very challenging. Accordingly, it is likely that many banks will deviate from their typical practices. Some may choose not to provide targets at all given the level of uncertainty in the macro environment. Some may provide wider ranges than usual. Some may choose to only provide near-term targets that they have more visibility on, rather than full year targets, and then update their expectations as the year progresses. And others may choose to speak directionally rather than providing specific targets (e.g., we expect to see some level of loan growth this year or we expect to see modest NIM expansion). As always, credibility is key to effective investor relations, and setting and meeting/beating expectations is a critical element of maintaining/building credibility. Management teams will have to carefully consider what form of guidance is appropriate for them to provide this year, given their level of visibility and confidence in the loan pipeline, deposit trends, asset quality, etc. so that they don’t set expectations too high and ultimately undermine their credibility when the expectations aren’t met. 

Deposit trends

The topics of deposit flows and pricing dominated many investor meetings during the fourth quarter, particularly as H.8 data showed that deposit balances are declining. Even banks with strong, low-cost deposit bases have had to raise rates to retain deposits or add longer-term fixed rate funding to offset deposit outflows and enhance their ability to manage funding costs going forward. Investors and analysts will be looking for updates on trends in deposit flows and pricing, whether outflows and unfavorable mix shifts are expected to continue as long as rates remain elevated, and color on how effective banks are at replacing outflows with deposits generated through business development efforts, particularly those that result in new, lower-cost commercial deposits.

Loan growth

Recent H.8 data and management commentary indicates that loan growth in the fourth quarter will be lower than what was experienced earlier in the year. Analysts and investors will be interested in understanding whether lower loan growth is a function of reduced loan demand, more conservative underwriting and loan production ahead of a possible recession, limiting loan production in certain asset classes, and/or reducing loan production due to funding constraints. As always, there will be a high level of interest in how loan pipelines are trending and if they have stabilized or continued to decline as many banks indicated they were seeing on their third quarter earnings calls. 

Balance sheet positioning

Heading into 2022, investors and analysts were highly focused on understanding the level of asset sensitivity so they could determine which banks were best positioned to capitalize on the rise in interest rates. Now, with some forecasts projecting that the Fed starts to cut rates during the second half of 2023, there will be interest in understanding whether management teams are doing anything to reduce asset sensitivity and move the balance sheet into a neutral or even liability-sensitive position in order to protect the NIM expansion that occurred during 2022. 

Credit quality

With growing concerns about a recession, investors and analysts will be looking for more data around early warning signs of credit deterioration, particularly trends in watchlist and substandard loans. Banks should be prepared to speak to the trends they are seeing, as well as how frequently they are getting updated financials to assess the health of borrowers, particularly in certain areas that are viewed as more susceptible to credit deterioration in the current environment such as office CRE, retail CRE, construction, SBA, and sub-prime consumer lending. There will also be interest in how banks view their level of reserves in light of the potential recessionary environment and which management teams are choosing to be proactive in building reserve levels to an even larger degree than what is dictated by current economic forecasts.

Expense control and strategic investments

Given the continued inflationary environment, there will be interest in how effectively banks are able to control expense growth in 2023. While setting expectations around expenses in 2023, when possible, banks should highlight areas of continued investment that they believe will position them to better capitalize on more favorable economic conditions and create long-term franchise value. Whether its adding banking talent, upgrading the technology platform, entering new markets, or taking market share in certain business lines, banks should emphasize when the strength of their franchise enables them to take advantage of competitors who are more significantly impacted by periods of economic weakness.

Mergers and acquisitions

The volume of transactions dropped significantly in 2022 as the uncertainty in the economic environment led to a more cautious approach to M&A and lower bank valuations made deal economics less attractive. Particularly for those banks that have successfully utilized M&A to growth their franchises, there will likely be interest in their current thinking around M&A and if they are open to doing deals or if they intend to remain on the sidelines until economic conditions are more favorable.

Please contact a member of our bank team if we can be of assistance.

Tony Rossi, CFA
Trossi@finprofiles.com
310. 622. 8221
Larry Clark, CFA
Lclark@jconlonfinprofiles.com
310. 622. 8223
Kevin Dobbs
Kdobbs@finprofiles.com
310. 622. 8245
Jack Drapacz
Jdrapacz@finprofiles.com
310. 622. 8230