Community Banks Brace for Challenging Year

For community bankers, 2018 was a downward march, culminating in a new low for the Bank Experience Index.  The index, which gauges access to capital, loan demand, funding costs, and deposit competition now compared to 12 months ago, saw the sharpest decline between Q3 and Q4 of 2018.

For expectations of the year to come, bankers also showed a decline in enthusiasm with the end result being that Q4 showed the lowest Bank Confidence Index recorded since its inception in 2015.

“Despite the enactment of regulatory reform and continuing good economic news, bankers were concerned about the direction of the industry and the economy in 2018, and they continue to be concerned about what’s in store this year,” said Mark Jacobsen, cofounder & CEO of Promontory Interfinancial Network.

The firm’s proprietary Bank Confidence Index hit the lowest level since the survey began. The Index is calculated by measuring bankers’ expectations for the 12 months ahead based on access to capital, loan demand, funding costs, and deposit competition. After ending 2017 at 50.5, the index dropped each quarter in 2018 and ended the year at 43.0, down 15%. (Charted on a scale of 0-100, a score of 50 represents the baseline expectation.)

Banker optimism about overall economic conditions for the 12 months ahead also dropped. Expectations fell throughout 2018 with 65% of respondents expecting improved conditions at the beginning of the first quarter to just 22% predicting betterment at the end of the fourth quarter. That represents a 43% decrease in the 12-month outlook (the period that covers 2019). Even so, most bank leaders indicated they do not foresee a recession hitting this year.

Respondents’ other projections for the future included slower growth in loan demand. Although 64% of bankers in Q4 2017 expected an increase in loan demand over the course of 2018, by Q4 2018, that number has now plummeted to 39%.

Bankers expect access to capital to remain roughly unchanged for 2019 – 74% think access to capital will remain the same, 9% forecast a worsening, and 17% expect an improvement.

Funding costs are expected to continue to rise with 84% of bankers projecting higher funding costs over the coming year. This heightened expectation is in line with 2017 levels, but lower than the 92-95% benchmarks recorded for the first three quarters of 2018.

Expectations for deposit competition have remained relatively stable on a year-over-year basis, though in Q4 2018, the percentage expecting greater competition (83%) was down from higher levels recorded part way through the year (88-90% in other quarters).

Source:  Promontory Interfinancial Network