Credit & Capital

Banks Tend to See a Bright 12 Months Coming

They're particularly cheerful about the outlook for funding costs, given the recent cut in interest rates.
David McCannAugust 21, 2019

Did you hear a recession may be on the way? Apparently, some banks — especially smaller ones — didn’t get the message.

In its latest quarterly survey of bank executives, Promontory Interfinancial Network found the participants more optimistic about business prospects for the coming 12 months than they had been since the fourth quarter of 2017.

The survey measures bankers’ level of confidence in their access to capital, loan demand, funding costs, and deposit competition. (Among the 484 respondents polled in early July, 52% were CFOs, 39% were CEOs, and 9% were bank presidents.)

Given expectations for a cut in interest rates, which the Federal Reserve fulfilled on July 31, the biggest change since the prior survey was in participants’ view of their funding costs. A plurality (41%) said they expected a decrease in funding costs over the next year. That was up 29 percentage points from the previous quarter and a 38-point leap from the same time a year ago.

The overall Bank Confidence Index measured 50.1, up almost 4 points from the prior quarter. In addition to the interest rate cut, Promontory suggested that the heightened optimism was a response to greater industry profits in the first quarter.

U.S. bank profits increased by $4.9 billion in the quarter, or 8.7%, from the first quarter of 2018. The Federal Deposit Insurance Corp. said the profits were driven by higher net interest income.

A third (32%) of the survey takers said economic conditions were better than they had been a year earlier, compared with 19% who judged conditions to have worsened.

Looking ahead, among executives at banks with less than $1 billion in assets, 26% said they thought economic conditions would be better in 12 months, and slightly more (28%) said the opposite. The outlook was darker among banks with $1 billion or more in assets; 32% of them thought conditions would be worse in a year, twice as many as those who thought conditions would be better.

On the issue of trade, however, nearly half (48%) of respondents said President Trump’s trade policies have had a negative effect on their businesses. Negative opinions of the trade war were highest in the West (67%) and Midwest (61%).

Another war the president is waging, against the news media, seems not to have resonated with bank executives. Almost all of the survey participants (96%) said they trust the information provided by traditional news sources. A majority (53%) said they do not use social media to find trustworthy news and information.