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Bankers talk around lending prospects, talk up need for stimulus

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Bank executives told investors a lot this week about the state of the industry — both in what they predicted for the near future, and what topics they studiously avoided.

Speaking at the start of the BancAnalysts Association of Boston’s virtual conference on Thursday, top officials of more than a half dozen financial institutions spoke in scant detail about commercial lending prospects, offered a mixed picture for consumer banking and downplayed election-related uncertainty.

Instead, they emphasized cost-cutting measures, noninterest income sources and their growing ability to cope with the customer-service challenges stemming from the pandemic.

They said they’re hopeful that the economy will withstand the resurgence of coronavirus cases, but several urged lawmakers to act as soon as they can on further stimulus.

Bank of America Chief Financial Officer Paul Donofrio called for “additional targeted stimulus” to help industries such as restaurants, recreation, airlines and cruise lines recover from COVID-19-related losses in revenue.

“Those are the types of industries we need to help, and likewise their employees are the ones that may be hurting on the consumer side,” he said. “That's why we believe that additional targeted stimulus to support the impacted industry, including [Paycheck Protection Program] loans for small businesses as well as continued benefits for unemployed consumers, is needed to help get them to normalcy as we work our way through this health crisis.”

L-R: Chris Gorman of KeyCorp, Diane Morais of Ally, and David Turner of Regions
KeyCorp CEO Chris Gorman (left) predicts commercial lending will remain muted over the next few quarters; Ally Bank executive Diane Morais says the consumer is hanging in there but “it’s still early innings;” and Regions CFO David Turner said “we have to control our headcount to control our expenses.”

U.S. consumers have so far held up extraordinarily well during the pandemic, said Diane Morais, the president of commercial and consumer banking products at the $185 billion-asset Ally Bank in Detroit..

“I think the consumer today is still healthy,” Morais said. “We’ll see what will happen with the second stimulus. That will help. But so far, so good, knowing that it’s still early innings.”

BofA’s Donofrio warned that credit card and commercial real estate portfolios are two areas industry-wide to watch for high concentrations of credit losses in the months ahead. About one-quarter of Bank of America’s $63 billion CRE portfolio is made up of office space, while multifamily, retail and hotels each make up about 10%, Donofrio said.

He reassured investors that BofA feels its balance sheet will ultimately be resilient. “The portfolio is regionally diverse,” he said. “So I mean we feel really good about where we are.”

Executives from Regions Financial, in Birmingham, Ala., said that lending has slowed as their clients are waiting out the pandemic. Would-be borrowers who in the past have tapped home equity lines or other forms of credit to make investments or even fund vacations have hoarded cash instead, they said.

Even though revenues are coming in for their business clients, Chief Financial Officer David Turner said “they’re just not reinvesting that back” into their operations as they try to get by.

In the months ahead, the $145.1 billion-asset company believes there is a low probability for another countrywide economic shutdown from the coronavirus, even as cases are on the rise. Still, echoing past comments, Turner said because revenues will be challenged for some time, Regions will continue to cut expenses. He spoke Thursday about trimming branch count to do so, though he did not share specific numbers.

“We have to control our headcount to control our expenses. Continuing branch consolidations are in order,” Turner said. “The branch count is one that we will challenge ourselves on and get headcount out of there.”

Looking ahead to 2021, KeyCorp Chairman and CEO Chris Gorman predicted faster growth in consumer lending than commercial, particularly in mortgage lending and at its consumer lending platform targeted toward health care professionals who want to refinance student debt and buy homes.

Certain macro factors favor that focus on health care workers, Gorman said. He noted that health care is expected to grow as an overall percentage of gross domestic product — from 18% in 2020 to 20% in 2028 — and added, “We think we’re really well positioned for that.”

While he expects commercial lending to remain muted over the next few quarters, Gorman also said Key has room to grow in lending to renewable energy and affordable housing.

The $170 billion-asset Key will continue to rely on fee income, particularly investment banking services, as a counterbalance to low interest rates, Gorman said. Third-quarter noninterest income grew 5% from the year-ago period to $681 million, boosted by growth in trust and investment services income, consumer mortgage income as well as cards and payments income.

Executives at Citizens Financial Group in Providence, R.I., also said that fee income and mortgage banking revenue in particular should help to offset the low-interest-rate environment.

Malcolm Griggs, the $179 billion-asset company’s chief risk officer, said hospitality sector businesses were still “a bit stressed,” and while brick-and-mortar retail has shown some improvement, it also remains vulnerable.

“Not only because of COVID and the shutdowns… but also because people’s buying habits have started to change a bit through the pandemic,” he said.

By contrast, multifamily, industrial properties and medical facilities have held up well.

Office properties could see a little bit of downward pressure on rents, but Griggs added, “I’m of the opinion that offices are not going to go away just because we’ve proven that people can work remotely.”

Mary Callahan Erdoes, CEO of JPMorgan Chase’s asset and wealth management unit, talked about the “surprisingly strong year” her business line is experiencing — which she attributed in part to product diversification and asset performance— and how the bank is “learning to live with” COVID-19.

That includes finding ways to keep branch functions accessible during the early months of the health crisis and figuring out ways to staff those branches while keeping employees and customers safe.

“We’re going to be living with this for a very, very long period of time, so learning to live with it has been one of the most important things we’ve done,” said Erdoes, whose unit oversees $3 trillion in client assets. “We’re learning about things we don’t need anymore … and we’re optimizing that.”

That includes doing more digitally or electronically, which frees up employees to do other work.

One thing that won’t change is the bank’s consumer wealth management delivery-by-branch strategy. In fact, the pandemic, which has killed more than 231,000 Americans and continues to surge in many parts of the country, reinforced the need for more, not less, advisory roles in branches, she said.

“You’re going to find a whole bunch more people who will be there to help with advice,” she said. “I think that’s one of the most exciting things to happen in the branches.”

Even while ballots were still being counted in battleground states Thursday, executives avoided the topic or limited their comments to very specific issues in response to direct questions from analysts. Some wanted to know what would happen if Democratic nominee Joe Biden’s lead in the electoral college held.

Regions’ Turner said if Biden ultimately takes the White House, he was not expecting a major hike in corporate taxes and that the Federal Reserve would continue its own stimulus efforts with a divided government.

“We’re going to get some sort of stimulus package, maybe not as much as we were. I don’t think tax rates are going up at the level as once was thought,” Turner said. “Now that we’ve voted, there’s nothing we can do. The results are going to be what they’re going to be.”

Though the U.S. economy has rebounded well since the early days of the pandemic, the path ahead may be bumpier, Goldman Sachs Chief Operating Officer John Waldron said in remarks later in the day.

“We’ve kind of recovered about 80% of the lost output at this point,” he said. “Getting that last 20% back could prove to be more challenging.”

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Commercial lending Consumer banking Coronavirus Stimulus bill Fee income Revenue and expenses Bank of America Regions Bank KeyCorp Ally Bank
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