R. Scott Siefers is a managing director and senior research analyst at Piper Sandler Cos., where he covers financial institutions, including Citizens Financial Group Inc. He has more than two decades of experience as a research analyst covering banks and other institutions. He has a bachelor’s degree in finance from Miami University of Ohio.
Siefers spoke with PBN about trends and takeaways from the latest round of bank earnings reports.
PBN: What were your major takeaways from third-quarter earnings?
SIEFERS: So far, generally, it’s been a pretty strong quarter. The majority of our banks are beating expectations, with continued reserve drawdowns probably the most visible driver.
Also, I’m very encouraged that underlying loan growth trends are finally returning. I feel like we’ve been waiting a long time for this to happen and we’re in the early innings there.
Additionally, fees have been very strong, as well, in things like mortgage, which has proven far more resilient than we might have thought; capital markets; as well as things like assets and wealth management.
The only real pressure point we’re seeing is that cost pressures are increasing and that’s a function of two different things. No. 1, ongoing investments in technology to compete with others within the banking system, as well as others within the fintech space. And No. 2, we’re starting to see more wage inflation, as well, at all levels of the workforce.
PBN: Did anything surprise you?
SIEFERS: One thing I have found surprising for really the last couple of quarters – and it’s continued this time around – is just the very rapid pace of deposit growth. A year ago at this time, we had already seen a massive influx of deposits into the system as stimulus money came in for all these extraordinary efforts to help consumers and businesses. But we figured those surge deposits would work their way back out of the system. Conversely, they’ve actually stuck around, they’ve continued to grow.
That’s for a couple of reasons. On the corporate side, businesses are making a lot of money, so they have a lot of excess cash that they’ve not invested yet. And even for those businesses that want to invest, it’s very difficult to do so because we have all these really snarled supply chain disruptions, companies are having difficulty finding workers. They would like to spend that money but it’s a little difficult to do so.
Additionally, there has been quite a bit [of] uncertainty about the pace and magnitude of the economic rebound. I think businesses and consumers so far have been hoarding a little extra cash in case we had, say, another surge in cases or something like that.
PBN: How do you think the economy and pace of rebound is going to impact banks’ earnings in the next quarter, or even going into the next year?
SIEFERS: There are two things we’re watching most closely. No. 1 is the durability of the economic rebound. We had just a fantastic summer that then took maybe a step back with the delta variant [in] late summer and into the fall but now seems to be back on track.
The main question in investors’ minds is how much of that is actual economic rebound and how much is just consumers spending money that they were literally given by the government. Is this just a sugar high or is it [an] actual economic rebound?
And the second thing is the question of how high interest rates will go. You’ve seen a move up at the long end of the curve as investors have gotten more concerned about inflation being more than transitory. And additionally, the market has started to price in more rapid increases in short-term interest rates by the Fed. That will be a good thing for the banks because their loan portfolios will be priced upward and generally improve margins, which have been under pressure for some time.
What we’re hoping for is kind of a Goldilocks scenario in which interest rates go up at a reasonable pace and we maintain this economic recovery.
PBN: Speaking of loan growth, total loans at most banks are still down compared with a year ago. How much is that due to the end of the Paycheck Protection Program and what needs to happen for stronger growth in non-PPP loans?
SEIFERS: Year-over-year comparisons are still heavily impacted by PPP. At its peak, PPP got to be about 5% of the industry’s loan portfolio and now it’s down to about 2%. With each passing day, it’s become less of a headwind. Nonetheless, it’s still 2% of the industry’s loans.
What I think most investors are really waiting most anxiously for is a rebound in commercial lending. Consumer borrowing has already been pretty strong. The one missing piece of the puzzle has been the commercial side, where you have these businesses with all this excess cash so they haven’t been borrowing, so we’re hoping that a resumption of that will really turbocharge the industry’s growth as a whole. It’s not going to take place overnight, though.
PBN: Over the last two quarters, there have been a lot of bank mergers and acquisitions announced. Are you expecting that trend to continue?
SIEFERS: I definitely expect additional mergers to be announced as we move forward. Despite what appears to be a pretty healthy outlook, there are still those cost pressures. Moreover, a lot of banks have really benefited from PPP and will no longer have that driver after this year and things like mortgages will be hard to difficult.
In a sense, 2021 will be about the best you’ll see in terms of things like reserve releases, mortgage, PPP. It seems highly likely that earnings next year will be down as much as 10%.
In order to compete, a lot of smaller banks will say we need more size and scale in order to combat some of these resources our competitors have. Additionally, there’s a lot of capital in the system and quite a bit of liquidity and there’s not enough loan growth to sop up all the excess in the system. So, you have a problem, a good problem, of too much capital and too much liquidity and too little growth.
Nancy Lavin is a PBN staff writer. You may reach her at Lavin@PBN.com.
