Bank Executive Business Outlook Survey

2015, Q2

Until now, the primary evidence that we’re reaching the end of cheap funding for banks has been anecdotal. Statements from large banking-industry bellwethers have predicted an impending scramble for certain deposits and a steep rise in funding costs. Now, we’re seeing some early indications that the shift to a tighter funding environment is starting to happen.

In Promontory Interfinancial Network’s Q2 2015 Bank Executive Business Outlook Survey, which includes the responses of 269 CEOs, presidents, and CFOs of banks across the country, 20% of bankers indicated that their institutions have experienced an increase in their cost of funds. Just three months ago, in the first-quarter edition of this survey, only 13% of survey respondents indicated they had experienced an increase in their cost of funds compared to the same period the prior year.

Banks expect that these early signs of rate activity forebode a widespread increase in funding costs. Nearly three-quarters of all respondents believe that funding costs will rise in the next 12 months, and a large majority of those who expect deposit costs to increase, expect the increase to be driven by the cost of retail deposits.

The rise in funding costs (in particular retail deposits), while attributable to a number of factors, suggests that the new Liquidity Coverage Ratio (LCR) is beginning to have an impact. The largest banks in the country have publicly stated that they plan to adjust their funding mix significantly in response to LCR rules and that includes a significant focus on bringing in more retail deposits. Other notable highlights from the Q2 survey include:

  • Bank optimism on lending fades. Most responding banks (69%) expect loan demand to increase over the next 12 months. That is 7 percentage points higher than those that report seeing loan growth over the past 12 months. But their overall expectation for loan growth is below what was reported in the Q1 survey.

  • Borrower credit and cash flow are primary obstacles to CRE lending. According to respondents, the biggest obstacle to CRE lending is finding borrowers with sufficient cash flow or credit quality, an indication that even as loan demand grows, there is still a shortage of qualified borrowers.

  • Small banks expect to retain a majority of their residential loans on balance sheet. Despite a significant shift away from residential loan originations by large banks, community banks continue to see residential loans as a component of their asset portfolios. Smaller banks, those with less than $1 billion in assets, reported that they expect to retain over half of all of their residential loans on balance sheet, while banks with between $1 billion and $10 billion in assets expect to hold nearly 40% of residential loans they qualify.

  • Banks continue to expand investment in digital. The explosion in digital banking services has become nearly universal for banks. Ninety-nine percent of responding banks expect to maintain or increase investments in their online banking services, while 97% of responding banks expect to maintain or increase their investment in mobile banking. Meanwhile, two primary areas of reduced investment are front-line staff and physical branches.

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Q2 2015 Banker Survey Image

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