US banks are bullish on the economy, but large and mid-cap banks have different outlooks on the changing regulatory environment
At the recent 2015 Credit Suisse Financial Services Forum, banks were upbeat about the state of the US economy, with most of the debate centering on the timing and size of the coming Fed rate hike. Since banks can’t count on a rate hike coming soon to relieve pressure on their net interest margins (NIM), they will continue to focus on costs for at least the first half of this year.
“Expenses remain very much in focus, though it seems incrementally more difficult to generate efficiency gains without revenue momentum. The first half of 2015 will clearly be challenging for most banks; the mortgage “boomlet” underway year-to-date is a welcome benefit, albeit unsustainable, to near term revenues,” write Credit Suisse analysts Susan Roth Katzke, Jill Shea, and Brian Gibbons.
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Large-cap banks see regulatory costs plateauing
Stress test results are just a couple of weeks away (Dodd-Frank stress test results are due March 5 and the Fed’s CCAR results are due March 11), and the Credit Suisse analysts said that banks are more confident that they have a handle on the process this year, which should translate to a smaller difference between in-house and Fed stressed capital ratio forecasts. Large banks said that the rate of regulatory change is slowing and they can see their regulatory costs beginning to plateau, but mid-caps warned that higher prudential standards are still pushing their costs up.
Banks keeping an eye on energy exposure
Another common theme at the forum was that banks of every size are going over their energy portfolios carefully, and some are increasing their loan loss reserves as a result. Zions Bancorporation is the most heavily exposed, at least in relative terms, with $3.2 billion in energy loans (8% of their total) broken down as 32% upstream, 33% oilfield services, 19% midstream, 12% manufacturing, and 4% other. Comerica has $3.5 billion in energy-related loans (7% of it total), Regions Financial has $3.4 billion (4%), and SunTrust has $4.6 billion (4%).
Bank of America and Citigroup have the largest energy-related loan balances with $23 billion and $21.6 outstanding respectively, representing 3% of their total loans in both cases,
Katzke, Shea, and Gibbons recommend Bank of America, Wells Fargo, and Goldman Sachs among large-caps, and KeyCorp and BB&T among mid-caps.