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Commercial Banking Performance — 4th Quarter 2016

Commercial LOBs saw double-digit earnings growth in 4Q16, with strong NIM improvement and a return to stable provision – but also slowing of loan growth.

Overall 4Q16 Results: Net Income was up 12% with ROA rising to 132 bp and NIM to 251 bp. The gap between loan growth and deposit growth narrowed as loan growth fell to single digits versus a year ago while deposit growth rose to 4% YoY.

Looking Ahead: Loan growth continued to slow, with the weakest growth being C&I. While CRE growth has outpaced C&I growth for the last several quarters we may begin to see this gap close as (1) some banks tightened underwriting standards on CRE loans in 4Q16, (2) banks may began to ease standards on C&I loans for 2017, and (3) C&I demand picks back up from the temporary pullback over the last two quarters caused by uncertainty from the election. Although deposit growth marginally outpaced loan growth this quarter, indicators still point to a rising L/D ratio and funding will persist to be an issue.

In the short term, banks will differentiate performance largely based on the quality of their deposit base and their ability to generate service fees. The Trump administration has been quick to action, so banks may see some impacts sooner rather than later. The proposal to lower taxes on repatriated cash to 10% could result in a mid-9 figure influx of corporate cash – with potential increases in capital distribution, cash balances and/or loan repayment.

Top of Mind: Securing core deposits will continue to be top of mind as (1) both LCR and NSFR continue to place a premium on operating deposits, (2) regional banks need commercial deposits to offset weakened retail deposit performance, and (3) banks continue to focus on primacy and winning the operating account. To drive deposit growth, banks will invest in deposit analytics, relationship pricing and bundling capabilities, and TM and other fee-generating businesses.

  • 4Q16 Details:
    Strong Earnings Growth: Net income up 12% YoY, due to higher NIM and lower provision; 4Q ROA rose to 132 bp.
  • Provision Stable: Loan loss provision dropped YoY but rose slightly vs. 3Q16, now stable compared to Oil & Gas spike earlier in 2016.
  • Loan Growth Slowed Again: Loan growth continued falling, now at 9% YoY; CRE still outpaces C&I growth.
  • Deposit Growth Still Lagging: YoY deposit growth increased to 4% but still substantially below loan growth.
  • Revenue Up: Revenue growth up 7% YoY, largely due to spread growth.
  • NIM Rising: NIM rose back to 251 bp, up 8 bp, reflecting the gradual rise of short-term LIBOR.
  • Expense Up YoY: Expense up 8% vs. a year ago, efficiency ratio now at 49%; not seeing operating leverage.


Pre-Tax Income Up: Net income grew 12% (YoY), driven by loan and NIM growth as well as decline in provision.


ROA improving slowly: Commercial ROA climbed to 132 bp, up 3 bp from prior quarter and well above low in 1Q16. Commercial ROAs declined steadily over the past four years due to spread compression, reaching a low in early 2016 due to Oil & Gas provisions. However, the corner has now turned, as rate increases translate to rising spreads.


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