Confidence of Bank Executives Is Up for Second Consecutive Quarter as Loan Demand Is Expected to Grow and Funding Costs to Dip
National Survey of Senior Bank Executives Highlights Perspectives on Year Ahead
ARLINGTON, VA (September 20, 2016) – For the second quarter in a row, there was an improvement in the Banker Confidence IndexSM, a measure of bank leaders’ expectations around four key conditions that affect the banking industry: access to capital, loan demand, funding costs, and deposit competition. The index rose to 52.1, up 1.6 points from the first quarter of 2016 and up 3.3 points since the end of the fourth quarter of 2015.
The index is derived from responses to Promontory Interfinancial Network’s quarterly survey of bank leaders—CEOs, presidents, and CFOs—at banks across the country. The results show that the majority of bank leaders continue to expect moderate growth in loan demand over the coming year. Nearly 62% of respondents indicated that they expect to see loan demand grow over the next 12 months. However, expectations for a funding cost increase have fallen.
The responses come in the wake of increased economic turmoil in Europe and mixed economic news in the United States, which has moderated expectations on how soon the Federal Reserve is likely to raise rates. Only 53% of respondents expect funding costs to rise in the next 12 months, and for those who do expect to see an increase, the primary driver is expected to be the cost of retail deposits.
“Bank leaders aren’t certain what to make of the latest economic developments,” said Mark Jacobsen, President and CEO at Promontory. “On one hand, they continue to foresee growth in loan demand. On the other hand, conflicting indicators of economic health make it difficult for them to predict when rates are going to move and how to manage pricing for loans and deposits in the short term.”
As rates continue to stay low, banks have been focusing on operational priorities to increase efficiency and stay competitive. For the second year in a row, respondents indicated that the operational area where they are most likely to increase investment is in mobile and online banking technology. More than 66% of respondents expect to increase their investment in mobile banking over the next 12 months and more than 61% expect to increase investment in online banking.
Other findings from the most recent quarterly survey include:
Majority of respondents believe that being larger—but not too large—is optimal for performance. Eighty-seven percent of respondents indicated that they felt they need to increase in asset size in order to perform at an optimal level in the current banking environment. Smaller community banks desired a larger increase (median increase of 25% growth in assets), while larger community banks desired a smaller increase (median increase of 10% growth in assets). Few respondents felt that it was optimal to grow beyond the $10 billion asset threshold.
In digital banking, bank leaders see their institutions as strong in safety and flexibility. Seventy-one percent of respondents indicated that they perceive flexibility in adopting new technology as a strength of their institutions, and 60% of respondents see online security as a strength. The biggest perceived weakness was developing new technology, a function which many banks don’t perform in-house.
Slow and steady (and strategic) is banking’s motto when it comes to new technology. The top adjectives selected by respondents to describe their relationship to digital technology were “cautious,” “strategic,” “safe,” “steady,” and “flexible.” Least selected were “experimental,” bold,” “sporadic,” and “resistant.”
European economy and the U.S. presidential election are seen as economic downers. Sixty-two percent of respondents see the economic turmoil in Europe as negatively impacting the environment for banking in the United States, and 41% of respondents expect the results of the U.S. presidential election to negatively impact banking, up from 8% last year at this time.
For a detailed report on the Banker Confidence Index, download the report here.
For more analysis of the results, download the Bank Executive Business Outlook Survey report.
About the Survey
The survey was completed online at the end of July by 214 senior bank leaders in the positions of CEO, president, or CFO. Compared to the asset-size distribution of the banking industry, responses were slightly weighted toward banks with between $1 billion and $10 billion in assets.
About Promontory Interfinancial Network, LLC
Promontory Interfinancial Network was founded by leading figures in the banking industry—Eugene Ludwig, Alan Blinder, Mark Jacobsen, and Alfred Moses—to provide financial institutions with profit-enhancing solutions. The founders envisioned a network, composed of thousands of financial institutions, whose “synthetic size” would help each member institution to compete more efficiently.
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