BANGALORE A large number of U.S. midcap banks are expected to post higher profits for the latest quarter as they make deeper cuts in their loan-loss reserves, but the lenders will have to show some signs of loan growth to retain investor interest.
Wall Street giants and tiny community lenders alike have struggled to boost loan growth as Americans reduce their appetite for debt in the wake of the worst financial crisis since the Great Depression.
Loan growth will be critical to revenue this year as banks look to increase their earning assets to offset a margin crunch in the low interest rate environment.
"The market is aware that there is a finite amount of reserve release, and what it is really hoping for will be some revenue growth," said Christopher Bingaman, a portfolio manager with hedge fund Diamond Hill Capital Management, which owns bank stocks.
Loans outstanding fell 0.9 percent in January and 6.8 percent in February, according to a report from the U.S. Federal Reserve. And expectations of loan growth range from slim to non-existent.
"I expect very little in terms of loan growth. I think relative to expectations, it could be a very modest positive for some companies just because expectations are so low," Bingaman said.
Any expected loan growth will likely come from banks with a strong exposure to commercial and industrial lending, the sole bright spot in an otherwise lackluster market.
Banks such as First Horizon (FHN.N), Comerica (CMA.N), Hancock Holding Co (HBHC.O), Iberiabank Corp (IBKC.O), Texas Capital Bancshares (TCBI.O), Private Bancorp (PVTB.O) are expected to grow their commercial loan portfolios, though their loan balances overall will continue to fall, as they jettison bad loans.
"Banks like Texas Capital, Iberia, Comerica and Hancock are poised to take market share (in commercial loans) from the larger banks," Raymond James analyst Michael Rose said.
Analysts with the best track records see these banks doing slightly better than the Wall Street expects, according to Thomson Reuters Starmine Smart Estimates.
The midcap banks have also hired seasoned commercial bankers from larger players in the industry, laying the groundwork for future loan growth.
"I don't expect this (the hiring) to have an immediate effect as they need to transition their clients. But over time, this will help," analyst Rose said.
While it is given that the smaller banks will follow their larger counterparts like PNC Financial (PNC.N), Wells Fargo (WFC.N), U.S. Bancorp (USB.N) and JPMorgan (JPM.N) in releasing loan loss reserves to boost earnings, the lingering question is the speed at which provisioning returns to normal levels.
"I think they will see continued improvement but the pace of that improvement will be important," portfolio manager Bingaman of Diamond Hill said.
While year-over-year comparisons will benefit the banks as the economy improves, unemployment remains high in a number of states and home prices have not rebounded from their lows. So some more pain may be likely, he added.
Location will also factor into any improvement in credit quality and earnings that the banks post this quarter.
Synovus Financial (SNV.N), Zions Bancorp (ZION.O), Sterling Financial STSA.O and United Community Bancorp (UCBI.O) will continue to post losses as they retain exposure to the troubled U.S. southeastern and midwestern markets.
With new regulations requiring higher capital levels, banks that are continuing to make losses may also look at selling themselves.
"I think the consolidation in the banking industry is poised to accelerate, but in the mean time we will see more bank failures," Oppenheimer analyst Terry McEvoy said. (Reporting by Jochelle Mendonca; Editing by Gopakumar Warrier)