Commercial ROA continues to improve despite weak deposit and lending growth.
ROA Rising: ROA has risen 37 bps from the five-year low of 1% in 1Q16. It is now at 137 bps for the quarter, returning to pre-2015 levels. NIM increases and provision expense decreases have largely driven this improvement. Net income for the last twelve months grew 19.4% vs. LTM 2Q16.
NIM Rising: NIM has risen by 13 bps since the start of the rising rate environment (Target FF +100bp, 3-mo LIBOR +89bp), although some banks have capitalized on the rising rate environment more than others. The NIM expansion is largely due to Commercial LOBs holding standard deposit rates constant as FF increased.
Efficiency Worsening: Bank expense ratios continue to worsen, despite increasing scale. Efficiency ratios have steadily risen over the last 5+ years, despite sizable revenue growth. Relative to the 1-year period ending 2Q16, expenses increased at 49% of the incremental revenues, compared to a 46% efficiency ratio in 2013.
While migration to digital is expected to generate cost savings, any benefits have been likely o set by increased spending for regulatory compliance and technology improvements.
Balance Growth: Loan growth continues to disappoint due to a number of factors:
- Weaker demand for C&I loans1 due to sluggish and uncertain economy.
- Trend of Oil & Gas clients closing their revolvers and returning to capital markets (See Debt Landscape).
- Approvals on leases falling to the mid seventies level from 80% in Sep 2015, due to rising net charge-offs.
- Tightened standards on CRE loans1.
Overall 2Q17 Results
ROA Jumped to 137bp but Balance Growth Continues to be Weak: Profitability came in strong this quarter with a return to pre-2015 ROA levels. NIM growth, expense reduction, and a tax benefit Wells Fargo were the three drivers of the ROA increase. However, balance growth remains weak: deposits decreased by 1% QoQ while overall loan growth was only at 1.1%.
- Moderate QoQ Earnings Growth: Pre-tax income up by 3%.
- Versus after-tax 8% (Wells Fargo tax benefit).
- YoY Pre-tax income grew 15% driven by net interest income.
- ROA Increased QoQ: 2Q17 ROA at 137 bps vs. 1Q at 128 bps.
- NIM Gaining Slowly: Slight increase to 258 bps compared to 255 bps last quarter.
- Provision Increased, almost doubling since 1Q17 (which was the lowest provision since 4Q14) as some banks took more write downs on portfolios (e.g., taxi medallion lending). On a YoY basis however, provision overall declined by around 72% versus 2Q16 which still had lingering effects of oil write downs.
- Revenue Growth Slowing down: only 1.6% QoQ rise due to slow increase in non-interest revenue.
- Expense down 2% QoQ, nearly offsetting the increase in provision.
- Deposits Fell 1% QoQ While Loans Increased by 1%: Balance growth was weak this quarter, though YoY deposits up 4.9% and loans up 4.3% (excluding acquisition impact), marking the first time in several years where YoY deposit growth caught up with loan growth.
1July 2017 Senior Loan Officer Opinion Survey