Bank Executive Business Outlook Survey

2015, Q4

The big question of when the Federal Reserve would start raising rates was answered in December 2015. With that decision, the Federal Reserve changed the direction of interest rate policy for the first time since the advent of the financial crisis and Great Recession.

But far from being a return to old times, banks now face a significantly different environment than any that they’ve previously experienced—from a substantially smaller industry in terms of the number of institutions to a shift in thinking regarding the role community banks will play in the lending market going forward.

In Promontory Interfinancial Network’s Q4 2015 Bank Executive Business Outlook Survey, which includes the responses of 175 CEOs, presidents, and CFOs of banks across the country, respondents indicated that they expect industry consolidation to continue at a pace similar to what they have seen since the credit crisis.

Respondents reported that they anticipate the number of institutions to decline by over 1,000 institutions over the next five years, with most of the decrease coming from banks with less than $1 billion in assets. This consolidation reflects some of the challenges that banks expect to see in lending and rising costs.

Other findings from the survey include:

The December Fed rate increase is already having an impact on banks.

Since the Federal Reserve increased interest rates just six weeks prior to the survey, it’s too soon to say what the long-term impact of the rate change will be, but so far, respondents report that the impact has been minimal on both sides of the balance sheet. With regard to funding, 55% of respondents indicated that their institutions have already seen an increase in wholesale funding costs. On the asset side, 42% of respondents indicated that they’ve seen
an increase in yields on C&I loans.

Banks expect Commercial Real Estate (CRE) loans to continue to play an outsized role in their lending.

CRE lending has grown substantially over the past 15 years as a share of community bank portfolios. Respondents indicated that they expect this trend to continue, even though they would prefer a more diverse mix that includes a larger role for consumer and C&I lending. This move towards more CRE may be partially driven by the ongoing decrease in yields on non-credit card consumer loans, which hit a 15-year low in 2015.

Barely half of respondents expect growth in loan demand to continue.

Expectations for growth in loan demand dropped to their lowest level in four quarters, according to this survey. Just more than half of survey respondents indicated that they expect loan demand to continue to increase, with the majority of those expecting an increase predicting only a moderate rise. Among larger banks (banks with between $1 billion and $10 billion in assets), only 36% expect loan demand to grow over the next 12 months.

Bankers expect to rely more heavily
on wholesale funding over the next
12 months.

Even with an uptick in the cost of wholesale funding, banks expect to rely on this source more than they would like.

Most bankers expect the rise in funding costs to be gradual

Despite the recent increase in wholesale funding costs, respondents indicated that they don’t expect their overall cost of funds to rise substantially; less than 3% expect a significant cost increase.

Reciprocal deposits play a key role for banks looking to protect deposit funding.

Eighty-eight percent of respondents indicated that reciprocal deposits play a role in helping them protect their relationships with depositors and 47% of respondents indicated that reciprocal deposits are either very important or extremely important to their efforts to retain existing depositors.

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