ViewPoint: National Banking Trends

Introduction | Spotlight: Banking and Emerging Cybersecurity Risks | Spotlight: A Dodd-Frank Milestone: Enhanced Prudential Standards Adopted | Spotlight: The Dwindling Size of Small Business Lending and the Impact of Bank Failures | State of the District| National Banking Trends

Banks are reporting in surveys that loan demand is picking up, and the largest banks are gearing up to capture some of that demand. Although fairly uneven over the last four quarters, loan growth has been stronger at regional and large banks (see the chart).

US Bank Performance

The smallest community banks have struggled to keep loans growing quarter-to-quarter. Commercial and industrial (C&I) loans remain the single biggest growth portfolio for most banks. In an effort to attract C&I loans during the past two years, banks have loosened underwriting standards and have reduced spreads. In addition to C&I, commercial real estate (CRE) has once again become a primary growth driver. As banks dip back into the CRE pool, especially in the Southeast, multifamily loans remain a primary focus. As community banks can attest, the improvement in loan growth is not without some weaknesses (see the chart).

Loan Growth Shrinks

After increasing rapidly over the past five years, values for agricultural land have declined recently, which could affect some agricultural loans. In addition, credit card balances have generally continued to decline, and although there has been more discussion about HELOCs over the past few months, in general, banks are still not underwriting a large volume, and growth remains negative.

The uneven loan growth is reflected in banks' return on average assets. The low interest rate environment has compressed the net interest margin, which declined again in the first quarter to 3.08 percent, 12 basis points lower than the prior year. The net interest margin for banks with assets above $10 billion has fallen below 3 percent. Earnings at these large banks have been greatly supported by the noninterest income, while community banks have struggled to develop new products and services that would generate the same additional income. The lack of loan and earnings growth has kept community banks in a cost-cutting mode, though the efficiency ratio has remained relatively unchanged for the past three year for banks with assets less than $1 billion.

On top of loan growth and earnings concerns, banks will have to contend with being Basel III-compliant. Already, the largest institutions are required to comply with Basel III. At the same time, the banking regulators continue to make adjustments to the capital ratios with the recent release of additional rules on the leverage ratios. In the first quarter, the largest institutions reported for the first time under Basel III. These new rules will require institutions with $700 million in assets to increase their leverage ratio from 3 percent to 5 percent to avoid restrictions on capital distributions and discretionary bonus payments.