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Commercial Banking Performance — 2nd Quarter 2016

Commercial LOB earnings recovered from last quarter’s one-time spike in loan loss provision

The Novantas Perspective series provides timely and expert viewpoints on a variety of detailed banking industry subjects.

Overall 2Q16 Results: Earnings rebounded from last quarter’s leap in loan loss provision, with ROA back to 4Q15 level of ~125 bp and earnings up 3% YoY. Doubled-digit loan growth continued to put pressure on slower deposit growth.

Looking Ahead: The first Fed Funds rate increase in 4Q15 has already played out, so commercial bankers must focus on price realization to achieve higher NIM. Robust loan growth will continue, while commercial deposit growth will fall short — increasing the pressure on core funding growth. Provision will expand modestly, absent further O&G deterioration. Short-term performance differentiators will be core deposit growth, loan spreads and fees.

Top of Mind: Securing core deposits comes to the fore as credit quality concerns ease up. The impact of LCR and now NSFR are both placing a premium on operating deposits and devaluing other deposits. This increases the value of deposit analytics, relationship pricing and bundling, and increasing TM and other fee revenues.

2Q16 Details:

  • Revenue Up: Revenue growth at 8% YoY — split evenly between spread and fee income.
  • Modest Earnings Growth: Net income rose by 3% YoY; ROA returned to 124 bp, reversing 1Q’s provision-driven declines.
  • Provision Normalized: Loan loss provision dropped back below 6% of revenue in 2Q16, halving the one-time increase in 1Q16 for oil & gas.
  • Loan Growth in Double-Digits: Loans grew almost 11% from a year ago.
  • Deposit Growth Lagging: A majority saw deposit decline, leading to further rise in loan-deposit ratios.
  • NIM Holding: NIM came in at 235 bp, down 3 bp — first Fed rate increase has largely played out.
  • Expense Also Up: Expense up 9% versus a year ago, but more modest versus prior quarter.


ROA Rebound: Current commercial ROA recovered to 124 bp, the same as 4Q despite a large drop in 1Q. This reflects the one-time nature of prior quarter provision spike, largely adjusting for oil & gas credit concerns. However, commercial ROAs have been pushed steadily downward over the past five years — though commercial profitability still outperforms consumer and retail banking.


Balance Sheet

Continued Loan Growth: Loan expansion continued in double digits, reflecting the strengthening economic recovery. We expect roughly similar growth in sectors other than oil & gas for the next several quarters.
Deposits Shrink: Commercial deposits shrank relative to a year ago and were flat versus 1Q16. A large component of this is a substantial decline in commercial deposit balances at JPMorgan, but also in part consistent with retail deposit growth slowdown.

Balance Sheet Growth

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