Sure, banks have seen asset quality improve. Profitability is higher than it was during the recession. The SNL U.S. Bank and Thrift Index of publicly traded banks has risen 88 percent since the start of 2012. But all is not happy-go-lucky in bank land.
Speakers at Bank Director’s Bank Audit and Risk Committees Conference discussed the slow economic recovery and the headwinds banks are facing as a result. The banking industry’s compound annual loan growth rate during the last few years of 3 percent is down from the average of 7 percent from 1993 to 2007, said Steve Hovde, president and CEO of the Chicago-based investment bank Hovde Group. Net interest margins are 50 basis points lower than they were at the start of the decade. Combined with low interest rates, weak loan demand is hurting growth and profitability. Banks are stretching for loans and pricing competition is difficult. The median return on average assets (ROAA) was .93 percent in the first quarter of 2015, even though half of the banking industry made an ROAA of 1 percent or better pre-recession, Hovde said.
“In this environment, net interest margins are the lowest point they’ve been in 25 years,’’ Hovde said. “Clearly, if we had a more vibrant economy, banks could go back to making more money.”
With the Federal Reserve keeping rates low for the foreseeable future, and all the pricing competition, bubbles could be forming in some sectors, Hovde said. He specifically mentioned multi-family housing and junk bonds as possibilities.
Even stock prices aren’t that great from a historical perspective. The SNL U.S. Bank and Thrift Index has only climbed 4.2 percent since the start of 2000, compared to 40.7 percent for the S&P 500 during that time.
And what about the economic forecast for housing, a significant economic driver and source of revenue for many banks?
Doug Duncan, the chief economist for Fannie Mae, said the housing market is in no way back to pre-recession levels. Although he expects an increase in mortgage originations in 2015 and 2016, refinancing volume is down.
Households are still deleveraging in the aftermath from the Great Recession, but that has stabilized somewhat. Consumer spending in this economic recovery has been “incredibly weak,’’ Duncan said. Only recently have consumers in surveys reported an expectation for future income gains.
Household growth, or the rate at which people are forming new households, has been depressed, as young adults have not been leaving the nest and getting their own apartments or buying homes in large numbers. Large numbers of adult children live at home. Millennials, burdened by college debt and the aftermath of the recession, are forming households at a slower pace than previous generations, and their real incomes are lower than the same generation a decade ago. It’s not that they don’t want to own houses, Duncan said. He said 76 percent of them think owning a house is a good idea financially. It’s just that they can’t afford it.
But household formation is expected to rebound in 2015 to 2020, as the economy continues to improve and employment grows, he said.