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Margins to Remain a Struggle into 2016
Friday, April 17, 2015 6:45 AM

As a group, community banks, like credit unions, enter first-quarter 2015 earnings season with cautious optimism: Their loan books are expanding, but their net interest margins remain under pressure amid the protracted low-rate environment, and their resources are stretched thin by heavy regulatory costs, according to an April 13 article on SNL Financial.

Among some 200 small- and mid-cap banks in its coverage universe, Keefe Bruyette & Woods anticipates overall sequential annualized loan growth of about 7 percent for the first quarter, down from 11 percent the previous quarter on typical early year seasonality but up from 6 percent a year earlier, analyst Christopher McGratty told SNL.

FBR Capital Markets analysts, in an earnings preview, said they also are looking for solid loan growth, particularly among larger community banks and smaller regionals, with strength in commercial-and-industrial lending and increasing activity on the commercial real estate front.

"With rates stagnating in recent quarters and our view that rates will stay lower into 2016, loan growth will likely play an even more pivotal role in bank performance in 2015 as Noninterest Margins remain weak and expense cut opportunities are increasingly marginal," the FBR Capital Markets analysts wrote.

While Federal Reserve policymakers are expected to at least begin to lift short-term interest rates later this year, many observers now anticipate they will take only baby steps.

That could mean continued low rates into 2016 and, by extension, ongoing margin pressure. Banks would need substantial loan growth to generate greater levels of interest income and offset hits to their Noninterest Margins, analysts say.

So while unemployment is low, modest wage growth and poor labor force participation cloud the jobs picture and help contain inflation, keeping it below the Fed's desired pace. The economy is not at full capacity by any means. This likely gives Fed policymakers added reason to move carefully on rate hikes.

In addition to rates, community banks, especially those on the small end in terms of asset size, are concerned about the impacts of lofty compliance costs on their profitability.

Small banks for several years have bemoaned intensifying regulatory burdens, most notably since rules under the 2010 Dodd-Frank Act starting piling up. Small banks, of course, have smaller bases over which to spread out costs and fewer resources in general. When they have to devote more staff to compliance, bankers say, they have to pull resources away from revenue-generating activity.


Source:  SNL Financial, 13 April 2015