Commercial LOB earnings recovered fully from the one-time spike in loan loss provision – though the LOB remains challenged to produce desired returns in the current environment.
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Overall 3Q16 Results: Earnings rebounded from reduction in loan losses with ROA rising to 128 bp. Higher loan growth continues to pressure much slower deposit growth, but C&I loan growth has slowed. The quarter also witnessed a spike in LIBOR though NIM increased marginally by 4 bp to 245 bp. Prime MMF balances continued their decline and banks seem to not have captured much of the out ow.
Looking Ahead: C&I lending will lag CRE growth; deposit growth will continue to lag, increasing pressure on core funding growth. At least part of the next Fed Funds rise may already be reflected in current LIBOR rates. Provision is more likely to rise than fall. U.S. election changes may add to uncertainty.
Top of Mind: Securing core deposits comes to the fore as commercial loan-to-deposit ratios keep rising; LCR and NSFR are both placing a premium on operating deposits and devaluing other deposits. This increases the value of deposit analytics, relationship pricing and bundling. To support the focus on generating core deposits, banks must ensure that TM capabilities are competitive given the strong relationship between core deposits and TM solutions.
- Strong Earnings Growth: Net income rose by 17% YoY due to lower provision; 3Q ROA rose to 128 bp, vs. 123 in 2Q and 103 in 1Q.
- Provision Normalized: Loan loss provision dropped down to 2% of revenue in 3Q16, ending huge increases for Oil & Gas.
- Loan Growth Slowing: Loans grew almost 11% from a year ago; but C&I was up only 0.6% from prior quarter.
- Deposit Growth Lagging: Deposits grew only 2% vs. a year ago, pushing up the mean loan-deposit ratio to 114%.
- Revenue Up: Revenue growth also came in at 11% YoY, split evenly between spread and fee income.
- NIM Rising: NIM rose back to 245 bp up 4 bp, re ecting the gradual rise of short-term LIBOR.
- Expense Also Up: Expense up 10% vs. a year ago, minimizing any bene t from operating leverage.
Change in Earnings
From Revenue Provision: The increase of $1.4 bil in pre-tax revenue was split between $2 bil in higher spread and fee revenue, half of which was taken by higher expense, and a 50% decline in loan loss provision.
ROA Rebound: Current commercial ROA climbed to 128 bp, up 5 bp from prior quarter and well above 103 bp in 1Q16. This re ects the one-time nature of prior quarter provision spike due largely to Oil & Gas credit concerns. Commercial ROAs were pushed steadily downward in past four years, but the corner may have been turned. We expect ROAs around 125 bp or so for next few quarters.