ABA Banking Journal - September 2007 - (Page 10)

briefing Snapshot What the first half tells us about the second W hat is in store for banking in the second-half? A look at trends in first-half performance metrics can give us some insight into what we might expect. The four core performance metrics—return on average assets (ROAA), return on average equity (ROAE), net interest margin, and efficiency ratio—have all worsened from the year-ago periods (see table). The trend last year was for these to continue to decline as the year advanced. Applying that same trend to 2007 would lead us to believe that while we saw an uptick when comparing the first and second quarters of 2007, the second half will see a pullback in these metrics. Net interest margins will likely continue to be compressed due to an unfavorable yield curve and a tighter market for deposits. The deposit market is perhaps the largest driver of the compression as banks are forced to raise yields to hold and to grow their deposit bases. The yield curve has continued to be a problem area. It showed signs of straightening out in the first half of the year, but then took a turn for the worse. Banks that have been patiently waiting out the yield curve are likely going to be left waiting throughout the remainder of the year. Since the bulk of bank income still comes from net interest income, ROAA and ROAE will be impacted by a general decline in net interest margin. The same phenomenon will spread into the efficiency ratio, which, coupled with the increased expense required to maintain and cultivate new relationships on the lending side, will drive that upward. The pullback will also be driven by credit quality concerns. A look at the trends shows that both the level of nonperformers and charge-offs has ticked upward on a year-over-year basis. Traditionally the fourth quarter has been a dumping ground for bad loans, so that will only act to amplify an already negative trend. The major area of concern for credit quality continues to be the housing market, with adjustable rate mortgages and home equity loans and lines of credit at the forefront. As has been well reported, many consumers borrowed beyond their means and have been hit hard by adjustable rate loans whose rates went up. The only real respite consumers have had is that the prime rate, against which the bulk of adjustable rate loans are indexed, has been stable, and indicators point to continued stability for the near term, as many ARMs reset. Other areas of concern include commercial real estate and construction lending. We have already seen construction-heavy lenders in Florida get hurt; it is likely this will spread to other areas as well. The trend could spread into commercial real estate space, especially if consumer spending pulls back, and as a result industry observers are paying close attention. On the growth side, loan and deposit growth were still positive, but had pulled back from year-ago values. Given how robustly these grew over the last few years, a slowdown is expected, but we need to keep an eye out. If they turn negative it could be bad news. Merger and acquisition activity will likely pick up as a result, but deal premiums will be down. EPS growth, however, was negative in both the first and second quarters on both an average and a median basis. This is a continuation of the trends from last year where it started to hit the wall. Look for continued pullback in the second half of the year. The latter half of 2007 may not be all milk and honey, but it will not be characterized by a total collapse. The banking system is robust and will work out the kinks that have been introduced by the recent cheap dollar markets. It will take some time, and it may not be pretty, but in the end the strong banks will survive and prosper. —John McCune, SNL Financial jmccune@snl.com Quarterly performance metrics Major-exchange-traded banks and thrifts 2007 Q2 Average Median 2007Q1 Average Median 2006Q4 Average Median 2006Q3 Average Median 2006Q2 Average Median 2006Q1 Average Median ROAA ROAE Net interest margin Efficiency ratio NPAs/assets NPLs/loans NCOs/avg loans Net loans growth Deposit growth EPS growth 0.88% 0.87% 9.39 3.63 9.61 3.51 0.82% 0.82% 8.73 3.57 8.90 3.50 0.84% 0.88% 8.83 3.64 66.02 0.44 0.53 0.21 13.58 16.02 4.43 9.78 3.58 64.09 0.32 0.35 0.09 7.16 8.28 0.00 0.94% 0.96% 10.41 3.74 64.48 0.41 0.48 0.14 12.13 9.19 7.55 11.07 3.66 62.73 0.28 0.33 0.05 8.55 5.58 2.70 0.94% 0.96% 10.52 3.79 64.18 0.37 0.45 0.13 17.81 12.49 10.56 11.41 3.72 62.69 0.25 0.31 0.05 13.05 7.75 6.45 0.97% 0.98% 10.83 11.01 3.78 3.72 64.44 62.88 0.38 0.46 0.11 14.45 13.13 15.38 0.25 0.30 0.04 9.35 9.44 8.82 66.22 64.7 0.53 0.58 0.18 11.45 6.94 -1.96 0.37 0.42 0.09 8.84 2.45 -2.79 67.81 65.70 0.50 0.60 0.14 8.49 9.95 -3.55 0.35 0.40 0.06 5.17 5.53 -4.44 Data as of August 1, 2007 Source: SNL Financial 10 SEPTEMBER 2007/ABA BANKING JOURNAL www.ababj.com/subscribe.html http://www.snl.com http://www.snl.com http://www.ababj.com/subscribe.html

Table of Contents Feed for the Digital Edition of ABA Banking Journal - September 2007

Contents Editor's Column Briefing: Why Money Sense is a Top Priority Briefing: Sleight of Mind Briefing: Snapshot: What the First Half Tells Us About the Second Half Briefing: ABA Resources ABA Chairman’s Position Briefing: Get Away and Get Ahead: ABA's Banking Leaders Forum Community Banking: Trim the Fat: Winning the "Battle of the Buck" Community Banking: Pass the Aspirin Cover Story: Meeting the Challenge of the "Unbanked" Bank Marketing: Don't Miss the Boom! On the Job: Time to Power Up Your Presentations? Insurance Sales: The Art & Craft of Cross Selling Tech Topics: The Price is Right? Tech Topics: Security: Protect Information First Tech Topics: Hackers for Hire? You Bet'cha Tech Topics: Case in Point: Tellers Scan, Too, at First Federal Compliance Clinic: Adverse Action Clarified The Economy Banker’s Mart To Advertise/Index of Advertisers

ABA Banking Journal - September 2007

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