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A Stable Outlook for US Banks: 6 Factors to Watch

 
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Overall, my outlook for US banks remains stable with some hope for a positive turn later in 2015. The game changer will be the Federal Reserve. Should the Fed begin to take steps towards higher rates this year, bank earnings could improve. Here are the highlights: 

1. Exposure to Energy 
Downplayed by most banks

Given the recent drop in oil prices, banks have started to report details about their exposure to the sector. Most banks reported exposures of less than 3% of assets, while emphasizing potential benefits to the domestic economy and consumer spending. While it is too early for banks to see deterioration in their direct exposure to the oil sector now, the markets will be watching closely for any signs of a reversal this year. 

2. Loan Growth

Remains muted, some hope for stronger growth rates later in 2015 

Loan growth rates should remain in the mid- to low-single digit range for the first half of 2015 – but there is hope for stronger growth rates in the second half of the year. 

Commercial and industrial loans remain the strongest growing segment. Some commercial customers remain cautious as they wait for the economy to strengthen further. However, inquiries from commercial customers are beginning to tick up and there could be a spike in borrowing ahead of interest rate increases, which leads to hope for stronger loan growth rates in the second half of 2015.

In terms of the consumer, auto loans were a very strong segment last year and I expect that to continue this year. I expect mortgage originations to be stable in the first quarter because any increase in refinancing activity will likely be offset by seasonally slower volumes ahead of the spring selling season.

3. Asset Quality

Historically strong, slippage likely in 2015 but not concerning

Asset quality has remained at historically strong levels. Some banks continue to see decreasing levels of early stage delinquencies, which signals continued asset quality improvement. However, the “seasoning” of commercial and industrial loans added in the last couple of years could spark slight deterioration in asset quality, as well as weakening in oil and gas loans, if prices remain low.

4. Interest-related Revenues

Interest rate increases would reverse declines

Continued low interest rates in 2015 and limited opportunities to reduce funding costs are expected to keep downward pressure on interest margins. With most banks having completed (or near completion) asset increases to meet their new liquidity requirements, the downward pressure on interest margins should be less than last year. 

5. Other Revenues

Noninterest income likely to remain stable

Although noninterest income at the large US banks was dinged by weak trading revenues in 2014, they were partially offset by decent investment banking results, as well as a slight rebound in mortgage banking revenues as refinancing volumes ticked upwards. Looking forward, noninterest income is likely to remain fairly stable and subject to the usual seasonal trends, with some increased mortgage activity early in the year. With decent pipelines, investment banking revenues should remain at least stable.

6. Expenses

Remains a focus, regulatory and litigation expenses remain headwinds

Expenses related to legacy mortgage issues continue to decline. Looking forward, litigation reserve increases are expected to remain a drag on earnings.  However, many banks believe their largest legal settlements are behind them and litigation expenses should begin to ebb later in 2015.
  

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This blog post is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. This information is subject to change at any time without notice.

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About the Authors

Loomis Sayles analysts are career professionals who offer deep knowledge and experience in a diversity of global asset classes and market sectors. These dedicated experts provide the insight essential to supporting our portfolio management teams across a wide range of investment strategies.

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