The Novantas Perspective series provides timely and expert viewpoints on a variety of detailed banking industry subjects.
Loan Loss Provision skyrocketed in 1Q16, while deposits actually shrank for the first time.
Overall 1Q16 Results: Provision for loan losses more than doubled in a single quarter — and rose by a factor of six versus a year ago — in large part from oil & gas concerns. Earnings tanked as a result, with ROA down 22 bp from the prior quarter, and net income falling 14% YoY. Deposits actually shrank, in part from the largest banks managing non-core balances downward in light of LCR rules. With loan growth continuing at double-digit rates, loan-to-deposit ratios are rising rapidly.
- Sharp Earnings Decline: Provision pushed down net income by 14% YoY; ROA fell 22 bp QoQ to 102 bp
- Provision Leap: Loan loss provision more than doubled in a quarter, spiking to 11.4% of revenue (vs. 4.8% in 4Q15) — oil and gas was the main culprit, along with loan balance growth and provision normalization
- Deposits Shrank: Many still grew deposits, but overall fell because of major decline at one money center
- Double-Digit Loan Growth: Loans grew almost 11% from a year ago
- NIM Rising: NIM rose modestly 4 bp to 238 bp — impact of December Fed rate rise — waiting for more
- Revenue Up: Revenue growth was almost 5%, largely from balance expansion, with fees falling slightly
- Expense Up As Well: Expense rose faster than revenue at close to 6% for the group
Looking Ahead: Given the Fed holding off on a rate increase, commercial bankers can expect balance sheet expansion without NIM improvement. High single-digit loan growth will continue to outpace deposit growth, making core deposits a major focus. A large portion of the latest provision increase is one time, so next quarter ROA should rise above 100 bp, and should improve further when rates rise again. Short-term performance differentiators will be oil & gas exposure, core deposit growth and maintaining loan spreads.
Top of Mind: Commercial bankers are squarely focused on credit quality, with spread compression easing up. Securing core deposits — and for the largest banks selectively shedding non-core deposits given LCR concerns — is a major focus of most. Novantas and TSI believe that analytic relationship pricing — for loans, deposits, TM and other fees — are the best source of incremental revenue in a tight market and provides strong guidance to RMs.
TSI Joins Novantas: On June 1, Novantas acquired Treasury Strategies, the leading treasury, payments and liquidity consultancy. TSI’s Financial Services practice is now integrated with Novantas Commercial Banking efforts, while TSI’s work with multinational CFOs will continue — and both will enhance Novantas insights into commercial banking and the behavior and needs of its commercial banking customers. We welcome our new colleagues aboard!
ROA’s Downward Trend: Over the last four years, Commercial ROAs have been pushed steadily downward. 1Q16 ROA was 102 bp, down sharply from prior quarter 124 bp. This quarter’s decline was almost entirely due to sharp increase in loan loss provision, in part for oil & gas exposures. Despite the decline, commercial LOB profitability still outperforms retail banking.