Bank Executive Business Outlook Survey

2017, Q3

Banker confidence in primary performance indicators for the industry continues to skew slightly negative according to results from our Q3 2017 Bank Executive Business Outlook Survey. This quarter’s survey further shows changes to the Banker Confidence IndexSM, now at 48.1, a half-point improvement from last quarter (47.6). While bankers’ outlook for the future may be improving, the Index nevertheless falls below the key threshold of 50 for the second quarter in a row, a first since the survey’s inception 11 quarters ago. (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.)

This cautionary outlook is a consistent theme throughout the survey and may represent ongoing frustration with political events in Washington, DC, or a fear that the spate of recent economic news may indicate a highpoint. On the other hand, it may be that bankers do not believe that economic conditions are as strong in their industry as in other sectors of the economy. Fewer than half (49.1%) of respondents saw economic conditions improve for their institutions over the past year. And even fewer (44.7%) expect to see improvements over the next 12 months.

This quarter, the survey also included supplemental questions dealing with banker perspectives on tax reform and interest rates. Findings show that community bankers are more optimistic than everyday Americans about tax reform this year. While respondents are split on the prospects for passage (49.1% Yes, 50.9% No), this stands in stark contrast to public polls that have shown only 14% of Americans believe it will be a reality this year.1

The Fed released a dot plot at the September Federal Open Market Committee (FOMC) meeting, indicating where each member projects the Fed Funds rate should be at the end of various years, as well as in the “longer run.” We asked respondents whether they believed the median rate of 2.75% based on FOMC member projections over the longer run is too high, too low, or about right. Only a slight majority (53.2%) agreed that the number is on target, while 38.8% believe that it is too high. We also asked respondents “how long do you think community banks will be able to lag rate increases and keep deposit betas (deposit rate changes relative to Fed interest rate changes) low?” About 52% of respondents indicated less than a year while close to 40% said more than a year.

In other news, 68.4% of respondents saw an increase in funding costs over the past year, and a whopping 86.9% foresee an increase in funding costs in the next 12 months.

This quarter, 63.5% of respondents indicated that deposit competition has increased compared to 12 months ago, up 6.1 percentage points from last quarter. Compared to the survey results from a year ago, the jump is even more dramatic (24.7 percentage points), underscoring that deposit competition is on the rise. And banks don’t expect competition to cool down any time soon—77.4% projected it will jump even further over the next year.

While deposit competition is increasing, respondents’ view of loan demand has been mixed—21% saw a decrease over the past 12 months and 51% saw an increase. Fifty-one percent predicted a further increase over the next year, while only 11% predicted a decrease.

Meanwhile, most bankers continue to see no major changes in access to capital. A stable majority (68.4%) claimed it is the same as a year ago, and 71.2% predicted it will remain that way in 12 months.

Regionally, predictions varied heavily. For example, 94% of respondents from the Northeast project moderate or significant growth in deposit competition, compared to 77.4% of bank respondents in total. Moreover, 66% of respondents from the South expect either moderate or significant improvement in loan demand over the next 12 months, compared to just 37% for those from the Northeast—a place where one in five respondents actually expect demand to moderately or significantly worsen. Banks in the Northeast also have a more pessimistic outlook with respect to economic conditions over the next year.

1 Blanton, Dana. “Fox News Poll: Tax reform important to voters, but most doubt it will happen.” Fox News, August 30, 2017. http://www.foxnews.com/politics/2017/08/30/fox-news-poll-tax-reform-important-to-voters-but-most-doubt-it-will-happen.html (accessed October 25, 2017).

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Bank Executive Business Outlook Survey

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