Despite a low interest-rate environment that may continue to hang around, bank leaders are optimistic for earnings in the near future.

More than a year after the start of the pandemic saw banks and their customers confronting the unknowns of a public health crisis and a recession, the latest quarterly earnings results for Massachusetts-based banks continue to point to an improving outlook. 

While the recent surge of COVID-19 cases in the U.S. raises some concerns about public health risks, the economy has largely remained open.  

For the banking industry, analysts have seen signs in recent months that loan growth and even margin pressure could start to turn. 

“Our view has been that the banks have exited the pandemic on stronger footings than they entered it,” said Cheryl Pate, a portfolio manager with Angel Oak Capital Advisors. “Looking forward from here, as the recovery strengthens, with the likelihood of higher interest rates and accelerating M&A activity, we really think the outlook for banks is bright.” 

Bottom-Line Outlook Improves 

Many bank and credit union executives expected to struggle at the start of the pandemic, concerned about whether customers would be able to make loan payments, said Tom O’Connor, a partner with GT Reilly and Co., a Milton-based firm offering audit and tax services to community banks and credit unions. 

“A lot of banks and credit unions added to their allowance for loan losses in anticipation of delinquencies, and for the most part that never really happened,” O’Connor said. “There are exceptions, but generally speaking, the year concluded really a whole lot better than anybody anticipated.” 

Fee income from the Paycheck Protection Program helped banks’ bottom lines, O’Connor said, and stimulus money for individuals and businesses ended up on bank and credit union balance sheets.  

But lenders have seen few opportunities for loan growth outside of the PPP. 

“New business loans were relatively scarce because people are still cautious about expanding because of what we’ve all been through,” O’Connor said. 

Leaders’ Optimism Up 

Recent months have seen community bankers grow more optimistic about the economy. A quarterly survey by the Conference of State Bank Supervisors showed that community banks in the first and second quarters had positive outlooks on economic conditions after holding a negative outlook during all four quarters of 2020. The second quarter Community Bank Sentiment Index showed that 41 percent of survey respondents said they expected profitability to improve, and 58 percent said they expected franchise value to improve. 

Business owners are also showing more optimism. JPMorgan Chase’s midyear 2021 Business Leaders Outlook Pulse survey found that 80 percent of midsize business owners surveyed anticipate a rise in revenue and sales. Almost half of survey respondents expect to increase investments in capital expenditures, up from 18 percent one year ago, and 38 percent expect an increase in credit needs for the remainder of 2021. 

The quarterly Citizens Business Conditions Index had its highest reading in three years, according to a statement from Citizens Bank, though results in the Massachusetts market had declined since the first quarter.  

“What we see at this stage of the recovery is strong momentum – the payoff of vaccinations, of the ongoing power of fiscal and monetary support, and of the growing readiness to return to normal activities,” Tony Bedikian, head of global markets at Citizens, said in the statement on July 22. “Inflation is worth watching and the verdict is still out on whether the inflation we have seen is transitory or beginning to surge. We are closely monitoring supply chain and labor data as well as the impacts of pent-up post-pandemic demand. Barring exogenous factors, the U.S. economy seems poised to continue its steady recovery through the second half of 2021.” 

Loan Growth Ahead 

The Federal Reserves July 2021 Senior Loan Officer Opinion Survey on Bank Lending Practices found that banks have reported easier standards and stronger demand for commercial and industrial loans and stronger demand for all commercial real estate loan categories. 

An indication that loan growth could start to improve is higher spending volumes on both the debit and credit sides, said Pate with Angel Oak Capital Advisers. She said volumes were tracking up year-over-year and also were more than 20 percent higher compared to the second quarter of 2019. 

Another leading indicator of accelerated loan growth, travel and expenses, had also started to improve in June after remaining negative in April, Pate said. 

“The question now is when do we transition to that higher growth and the next leg up on the story,” she said. 

Diane McLaughlin

Community banks have already shown higher loan growth than the overall banking sector, Pate said, adding that their participation in PPP had opened up new avenues for gaining customers. Deposit share at these banks has also increased  

“We are most positive on the community banking sector within the banking sector overall,” Pate said. 

Consumer loans could start to accelerate later this year, Pate said, followed by commercial loan growth next year. The yield curve has already flattened compared to earlier this year, Pate said, but it should be nearing its inflection point even though the short end of the curve is not expected to move up until 2023. She also expects the industry to approach the inflection point on net interest margin in the next quarter or so. 

As Massachusetts has already seen, the current economic conditions have also meant a resurgence in mergers and acquisitions this year. Pate said banks could benefit in the low-rate environment by M&A, driving efficiencies and achieving scale. 


Conditions Point to Loan Growth

by Diane McLaughlin time to read: 4 min