Commercial Banking Performance 3rd Quarter 2017

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1 Commercial Banking Performance 3rd Quarter 2017 Commercial Banking performance has become more varied, raising the question are you different? TRENDS Performance Becoming More Varied Across Banks: Since 2014 there has been a rise in the variance of commercial loan and deposit growth performance across commercial LOBs, particularly for deposit growth where the level of variability has doubled (as measured by the coefficient of variation). ECR Beginning to Eat at Fee Revenue: Non-interest revenue fell 1% QoQ and net treasury management fee income fell by 3% over that same time period. Some banks have finally felt competitive pressure to offer higher earnings credit rates to win and retain operating balances. Rising ECR is likely a contributing factor in the drop in noninterest revenue this quarter 1, and is a trend that is likely to continue with commercial non-interest income expected to maintain flat growth for the next few quarters. Most Banks Grew Commercial Deposits in Line with Loans: Banks tend to have similar commercial loan and deposit growth rates, though that is not the case for the Big 3. On average, loan growth and deposit growth differed by. CALL TO ACTION Faced with a diverging market in terms of performance, it is essential that banks differentiate themselves to drive growth across both loans and deposits. We strongly believe that the basis for competition is shifting from functionality and relationship to advice and client experience. COMMERCIAL LOAN AND DEPOSIT GROWTH COEFFICIENT OF VARIATION 2 ( ) 25 Loan Growth COV Deposit Growth COV 213% % COMMERCIAL LOAN AND DEPOSIT GROWTH (YTD 3Q17 VS. YTD 3Q16) Loan Growth 2 Big PERFORMANCE Pre-tax ROA Rose to 199bp as NIM Gained Slowly: Profitability rose 1bp this quarter as NIM rose 3bps. However, balance growth remains weak as deposits increased by 2. QoQ and overall loan growth was only at 0.. Note that Post-tax ROA fell largely due to an increase in tax expense which normalized after Wells Fargo s large tax benefit in 2Q ROA, NIM 3.3% Deposit Growth ROA Pre-Tax ROA NIM 2.61% 2.3% 1.99% % Q12 3Q13 3Q14 3Q15 3Q16 3Q17 1 Average middle market ECR grew 4bp between April and September 2017 Novantas Quarterly Deposit Survey 2 Coefficient of Variation defined as standard deviation divided by mean for the sample of banks DECEMBER

2 CHANGE IN PRE-TAX INCOME (LTM VS. PRIOR LTM) $46 bil $41 $36 $31 $26 $21 $16 $11 $6 Notes: LTM = Last Twelve Months LTM 3Q16 Pre-Tax Income Spread revenue up 10. Net Interest Income Fee revenue down 0.1% Non-Interest Income Non-interest expense up 5. Expense Loan loss provision down 73. Provision 42.5 Pre-tax income up 17.3% LTM 3Q17 Pre-Tax Income INCOME STATEMENT Moderate Income Growth: LTM pre-tax income is up 1 versus the prior LTM, propelled by spread growth of 1. Provision Down Compared with O&G Write Downs: LTM provision overall declined by around 7 versus the prior year that was heavily impacted by the effects of oil and gas portfolios. Revenue Growth Slowing: LTM is up due to flat growth in non-interest income, which is also down 1% QoQ. Expense up LTM, keeping pace with revenue growth. BALANCE SHEET GROWTH (YoY) INDUSTRY C&I AND CRE LOAN YoY GROWTH (3Q07 3Q17) Loan Growth Deposit Growth Loan Growth Deposit Growth C&I Com RE 3.1% % 4.3% 4.9% Q07 3Q08 3Q09 3Q10 3Q11 3Q12 3Q13 3Q14 3Q15 3Q16 3Q Q16 3Q16 4Q16 1Q17 2Q17 3Q17 BALANCE SHEET Both Loan and Deposit Growth Down: Both deposit and loan YoY growth are down versus prior quarter. Mid-single digit growth may be the new norm for the foreseeable future as companies remain uncertain about the future. Loan Growth Slowed Again: YoY loan growth slowed down again, now down to 4. (excluding impact from acquisitions) LOAN MIX Growth Slowing: CRE growth continues to lead C&I growth. Most of the CRE growth driven by investor RE. Source: FDIC, regulatory filings via SNL Loan Type YoY Growth 2Q17 Bal ($B) C&I 2. 1,989 CRE 6. 2,108 OORE 3.3% 526 MF 6.9% 300 C&D 9.1% Deposits Growth Still Strong vs. a Year Ago: Commercial deposits grew by 3. (YoY), with continued high level of variation in growth rates across bank commercial units. QoQ, deposits are up July 2017 Senior Loan Officer Opinion Survey DECEMBER

3 LOAN LANDSCAPE Loan growth continues to disappoint due to: Tightened standards on CRE loans 1. Weaker demand for C&I loans1 due to sluggish and uncertain economy. Attractive rates and term structure being offered by non-bank FIs. CRE Falling: Several banks have seen a lower CRE growth relating to a number of factors, including increased competition and caution (over stage in credit cycle and prices). Some relevant excerpts from earnings call transcripts: While we had nice growth in CRE for a few years, we have been a little bit more holding stable right now in the environment we are in not because we are seeing any increase in losses, but just concerned about where we are in the stage of the cycle with CRE, especially multi-family, etc. Curt Farmer, President Comerica With CRE we re still outpacing the industry, but we ve kind of gone from very strong to strong, and we would continue to expect that to slowly moderate. And that s a number of things. It s some higher rates. It s actually a lot of competition. And then it s a lot also about client selectivity given where we are in the cycle. So we are being very cautious about new deals we add to the pipeline and the client selection we have. Marianne Lake, CFO organ We pulled back a little bit on CRE. So we re still servicing customers there. We re still making loans we re just being a little bit more cautious, and so you're not seeing a lot of growth in our CRE balances. Paul Donofrio, CFO Bank of America TOTAL LOAN, C&I, AND CRE GROWTH (YoY) LOB Loan Growth (YoY) Bank C&I Growth (YoY) Bank CRE Growth (YoY) % 1 2 1% 2 Loan growth at banks with the highest loan growth has been driven by C&I growth over the last year * 11% % -11% 1% % 3% -1% -1% - -1% - 1% A few banks cut CRE growth, driving loan growth down LOAN GROWTH DISPERSION Loan Growth Mixed: Loan growth (LTM) was mediocre at best this year, with fewer banks achieving double-digit growth. Banks with the highest loan growth continued to have outsized CRE growth. More banks cut CRE growth this quarter at the expense of total loan growth due to further tightening of standards as well as decreased demand (as the Senior Loan Officer Opinion Survey suggests many banks reported). Key increased its mix in CRE with the First Niagara acquisition this increased mix may temper its future CRE growth. Commerciallyfocused banks like ServisFirst, Silicon Valley, and Texas Capital continued to outperform traditional banks with strong YoY C&I growth. 1 July 2017 Senior Loan Officer Opinion Survey * Not adjusted for mergers/acquisitions. Note that LOB Loan growth and Bank C&I and CRE growth may not align as they are based on different sources and other commercial loans are not shown. Bank Loan growth is based on total loan growth for the Commercial LOB in earnings releases while Bank C&I and CRE growth are based on call reports. DECEMBER

4 COMMERCIAL LOB DEPOSIT GROWTH VS. OTHER CASH (YoY) 1 1 Commercial Deposits Business Cash Business MMF Holdings 3Q12 3Q13 3Q14 3Q15 3Q16 3Q DEPOSIT GROWTH Business Cash Growth Outpacing Deposit Growth: Deposits continue to grow, but corporations are placing more of their cash outside of deposits. Commercial deposits grew by 3% in the last twelve months, coming in weaker than the prior quarter s YoY growth, while business cash growth reached 6. YoY as of 2Q17. Looking Forward: Deposit growth will remain a top priority for the Commercial LOB into the end of Banks will need more than rate to win deposits modest link has been drawn between banks that offer higher rates on commercial deposits and higher deposit growth rates (Source: Novantas Commercial Deposit Study). Banks will have to rely on targeted cross-sell strategies and advanced analytics in commercial deposit management and decision-making. Notes: Commercial Deposits is based on the banks that report on the Commercial LOB while Business Cash and MMF Holdings includes, across all Non-Financial Businesses, Checkable Deposits & Currency, Time & Savings Deposits, Money Market Fund Shares, and Repos as reported by the Federal Reserve Z1 quarterly release. Sector Earnings Growth YoY $B % Technology $ % Energy $ Health Care $ % Consumer Discretionary $ Consumer Staples $ Industrials $ % Materials $ Real Estate $ Telecom -$ Utilities -$ Financials -$ % Total $ % CORPORATE EARNINGS GROWTH Corporate Earnings Growth is up by 8.3% YoY: Earnings growth of S&P 500 companies continues to be high, partially due to the rebound of the energy sector. While earnings overall increased by 8.3%, commercial deposits are only up 3.. It s likely that corporates are disproportionally paying down debt or investing capital with these earnings, rather than placing money with deposits. There is also significant variation by industry, with strong growth coming from tech and energy sectors that drove upwards of 8 of the total growth. We see banks that specialize in these industries show stronger-than-average deposit growth. Source: Thomson Reuters DECEMBER

5 HISTORICAL COMMERCIAL L/D RATIO 14 Big 3 Large Regional Regional 13 LOAN GROWTH (LTM) VS. L/D RATIO (3Q16) Q12 a 3Q13 3Q14 v 3Q14 3Q15 v 3Q16 3Q17 v Ln/Dep LOAN/DEPOSIT RATIO L/D Ratio Down: Commercial L/D ratio overall fell this quarter as QoQ deposit growth outpaced loan growth. With rising rates and deposit balances at risk, deposits will remain an ongoing concern for Commercial LOBs. Commercial LOBs with Lower L/D Ratios Achieved Highest Loan Growth Rates. Most commercial LOBs have an L/D ratio between 10 and 15. Commercial LOBs with lower L/D ratios have generally achieved stronger loan growth. Notes: Large Regional =,,, ; Regional =,,,,,, and * Not adjusted for mergers/acquisitions COMMERCIAL LOB DEPOSIT MIX % of Deposits ($) DDA MMDA Sweeps TD s 2Q17 71% DDA 9% SWEEPS 3Q17 DEPOSIT MIX 7 of Deposits in DDA: The mix of DDA is mostly flat QoQ, despite the recent movements in Fed Funds. Novantas analysis suggests that up to 5 of DDA balances are at risk from rising interest rates. Rate moves weren t yet of sufficient magnitude to produce material outflows from or repricing of DDA balances. Commercial balances, however, could move more quickly in this rising rate cycle as corporates enjoy enhanced visibility into cash and less friction to invest. Banks are faced with a dilemma in this environment: increase rates, lose hard dollar fees and increase interest expense or maintain rates and risk losing balances. As rates have remained relatively low, we have not seen the rise of new product types to attract money away from deposits. 7 Notes: Data from Novantas Commercial Deposit Study Deposit mix controls for the same banks across quarters DECEMBER

6 INCOME STATEMENT GROWTH (YoY) EFFICIENCY AND PROVISION RATIOS 5 Efficiency Ratio (left axis) Provision Ratio (right axis) 1 Revenue Growth Expense Growth Net Income Growth % 1 11% 9% 1 1 9% 9% 2Q16 3Q16 4Q16 1Q17 2Q17 3Q Q10 3Q11 3Q12 3Q13 3Q14 3Q15 3Q16 3Q17 INCOME STATEMENT Revenue Up: Revenue continues to grow, up YoY, mostly due to NIM growth. Expense Up Too: expense growth vs. 3Q16. Net Income Up 9%: Earnings were up 9% from a year ago, largely due to a continued trend of decline in provision (-5), but also due to NIM growth. EXPENSE AND PROVISION OVER TIME Provision Drops: Loan loss provisions down by 5 YoY but higher vs. prior quarter, increasing the provision ratio to 2. as % of revenue. Large banks such as drove the quarterly hike in provision. Efficiency Ratio Up: Efficiency ratio increased this quarter to 49%. With the increase of digitalization, the expectation would be that we would see this ratio drop as NIM increases, but that has not panned out. Hypothesis is that this has been driven by expenditures on further technology improvements. NIM AND FEE REVENUE TREASURY MANAGEMENT REVENUE 3.5 NIM NonIR/Rev 5 1 Industry TM Revenue Growth (YoY) Q12 3Q13 3Q14 3Q15 3Q16 3Q17 3Q15 1Q16 3Q16 1Q17 3Q17 BALANCE SHEET INCOME NIM Up, Fees Down YoY: NIM continues to rise, though slowly, mostly related to rising interest rates. while, noninterest revenue fell as percent of total revenue. With rising rates and growing spread revenue, this trend will likely continue. TREASURY MANAGEMENT REVENUE TM Revenue Up 1 vs. Year Ago: Treasury management revenue remains strong, mostly due to deposit growth and spread expansion. Novantas estimates that net TM fees (excl. card and merchant) grew ~ YoY, but are down ~3% QoQ with higher earnings credits likely cannibalizing net TM fees. Note: Revenue includes deposit spread, TM fees, and may for some banks include card / other. Based on data available from, BofA, US Bank,, WF, Citi, 5/3, and Key. Deposit spread was estimated for banks that don t report total revenue. DECEMBER

7 RATE BETAS AS OF SEPTEMBER BPS INCREASE IN FF RATE SINCE DEC 2015 T-bill (1 mo) CP (1 day, Non-Fl) MMF-Prime MMF-Govt/Treas MMDA-Max Exception MMDA-Typical Exception MMDA-Average Rate MMDA-Standard DDA-ECR Max Exception DDA-ECR Typical Exception DDA-ECR Average Rate DDA-ECR Standard 1% 1 21% DEPOSIT BETA Deposit Rates Mostly Flat: As the Fed Funds rate increased from 25bp to 125bp, banks have minimized increases to standard rates, choosing instead to increase the occurrence and magnitude of exception rates. short-term instruments in the market have experienced betas above Managing Rate Betas: Commercial LOBs are managing rate betas by rationalizing current portfolio pricing and offering higher rates on new deals (improving, for now, the dollar-weighted average portfolio rate). They are stepping down premium MMDA rates over time; and, for ECR, letting rates catch up. The challenge banks face is that at some point the volume of exception requests will be overwhelming and the benefits of lagging standard rates will be outweighed by the costs of employing and managing exception pricing. Notes: Beta calculated on 100bp increase in Fed Funds, beta is based on same-bank view Source: Novantas Commercial Deposit Study COMMERCIAL LOB NIM VS. 3-MONTH LIBOR AND CREDIT SPREAD Commercial LOB NIM 3-mo LIBOR Credit Spread 0.0 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 NIM CHANGE NIM Continues to Move up Slowly: As 3-mo LIBOR rose 11 bps during the last quarter (and 52 bp LTM), we ve continued to see a slow rise in Commercial NIM (up 3 bp QoQ and 13bp YoY), while credit spreads continue to decrease. Given the currently low beta on commercial deposits due to concentration in DDA, this is a low rise in NIM. As fixed rate assets roll off, combined with FF increases slowing down, we should see a more noticeable rise in commercial NIM % 0.69% 2.61% 1.31% 0.59% Bank NIM LTM 37bp 34bp 33bp 17bp 17bp 12bp 11bp 11bp 9bp 7bp 6bp -2bp -6bp -16bp -17bp Notes: Credit Spread based on 5Y High Quality Corporate bond rates less 5Y Treasury DECEMBER

8 LOAN GROWTH, DEPOSIT GROWN, REVENUE GROWTH, NET INTEREST INCOME GROWTH, AND NON-INTEREST INCOME GROWTH YoY, AND ROA 3Q17 Loan Growth (YoY) Deposit Growth (YoY) Revenue Growth (YoY) % % 10.9% % % % % 8.9% % % % % 1.3% 3.9% 1.9% -0.9% % -6.3% -0.9% % -6. Net Interest Income Growth (YoY) Non-Interest Revenue Growth (YoY) ROA (3Q17) % % 1 11% 1 3% % 1.5 9% 1.5 9% -1% % % -3% 1.0 1% - -11% - -13% % 0.99% * Known M&A transaction; growth rates not adjusted for any M&A or LOB reporting changes. DECEMBER

9 PROVISION/REVENUE, PROVISION/ASSETS, NIM, AND 3Q17 LOANS/DEPOSITS Provision /Revenue (3Q17) Provision /Assets (3Q17) NIM (3Q17) % 3.39% % % % % % -1.1% % % Loans/Deposits (3Q17) % % * Known M&A transaction; growth rates not adjusted for any M&A or LOB reporting changes. DECEMBER

10 COMMERCIAL LOBs (3Q17, $ BIL) BANK LOB LOANS DEPOSITS REVENUE organ Commercial Banking Bank of America Global Banking Wells Fargo Wholesale Banking US Bank Wholesale Banking & CRE Financial Corporate & Institutional Banking Capital One Commercial Banking SunTrust Wholesale Banking Fifth Third Commercial Banking CIFI Citizens Commercial Banking KeyCorp Corporate Bank Comerica Business Bank ServisFirst Bank Commercial Banking Silicon Valley Bank Commercial Banking Texas Capital Commercial Banking Commercial Banking ABOUT COMMERCIAL LOBs & DATA Novantas compiles and comments on the commercial line of business results of public banks large enough to disclose relatively complete commercial segment results in their earnings releases. Numbers are as reported, and are not adjusted for any M&A or LOB reporting changes. Ratios are calculated (vs. stated) based on disclosed balance sheet and income statement data. 1 includes: Pacific Western Bank, Mizuho Bank, and Signature Bank. Commercial Banking Solutions at Novantas provides analytics and technology to help commercial bankers in a range of critical issues, including: pricing optimization for deposits, TM, lending and relationships; sales force deployment and negotiation effectiveness; product development and capabilities enhancement; and operating model transformation of origination, onboarding and service. For more information, contact one of our commercial banking experts, or visit DECEMBER