Bank Executive Business Outlook Survey
Expectations regarding overall economic conditions for the next 12 months were lower this quarter as the slide that started in the first quarter of this year continued. In the fourth quarter of 2016, some 60% of banks were significantly or moderately confident that economic conditions for their bank would improve. That number dropped to 46.4% last quarter and declined to 41.2% this quarter.
This decline may be an indication that the banking sector is becoming increasingly wary about the prospects for legislative and regulatory change coming from Washington, DC, or anywhere else for that matter. Or it could just be a correction in the level of expectations.
Meanwhile, the Banker Confidence IndexSM turned into negative territory for only the second time since the survey was launched over two years ago. The Index, which tracks banker expectations in four key areas (access to capital, loan demand, funding costs, and deposit competition) slipped to 47.6 this quarter versus 50.4 in the first quarter of 2017. This indicates that banks are somewhat pessimistic about the next 12 months. (Charted on a scale of 0-100, a score over 50 can be read as expansionary. A result below 50 can be read as contractionary.)
Stagnation in the Index suggests that bankers remain unsure about the future. We will have to wait for next quarter’s results to gain a better sense of which direction the Index will go. Suffice it to say, the cautionary outlook is consistent with other results from the survey, including expectations regarding overall economic conditions.
Along with the core tracking questions, this survey also included supplemental questions on possible regulatory and legislative changes and the economy. Not surprisingly, bank respondents (by a large margin) believe the current regulatory environment is an impediment to lending. Yet banks were neutral when asked if they believed leadership changes at the top positions at regulatory agencies would improve the lending environment.
Despite the desire for regulatory relief, bank respondents indicated that failure to enact corporate tax reform was a bigger threat to the nation’s economic well-being than passage of regulatory relief legislation, the debt ceiling, or a federal budget to keep the government open.
Funding costs have been rising since the third quarter of 2016. Nearly 70% of bank respondents across all asset-size tiers and regions reported higher funding costs this quarter. This compares to 66% last quarter.
About three-fourths of all respondents to this quarter’s survey expect to see increases in deposit competition over the next 12 months, up from 65% from last quarter. The number of banks that have experienced an increase in deposit competition has also ticked up slightly, with 57% indicating that deposit competition has either moderately or significantly worsened compared to 12 months ago.
Meanwhile, nearly 55% of respondents experienced a moderate or significant increase in loan demand this quarter. This was a sizable increase over last quarter’s survey, when 47% of respondents—the lowest level ever recorded in the survey—experienced such increases in loan demand. The question is whether this is a permanent correction or a temporary blip.
More of the same continues to be the sentiment among most bankers when it comes to access to capital. A significant majority of banks (71%) have experienced no change in their access to capital over the past 12 months, and a similar amount (74%) expect the status quo over the next 12. These numbers are slightly higher than reported last quarter, but are consistent with the surveys conducted throughout 2016.
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