On November 5th and 6th, we attended the 2015 Banc Analysts Association of Boston conference (BAAB), at which many of the biggest banks in the United States presented. The theme of the conference was growth, with a focus on technological change, although presenters used the venue to cover a variety of issues, which are outlined below.
For the most part, there was a sombre tone in regards to interest rates at the conference. Banks have given up on waiting for the Fed to move, and are accordingly budgeting for no rate hikes over the next year. There was a clear divide amongst participants in regards to how to structure their asset mixes. Multiple banks spoke of decreasing their asset sensitivity given their views on the Fed’s actions, while others noted that they have not replaced hedges as they ran off, leaving them more rate-sensitive than before. It should be noted that as the conference took place on Thursday and Friday, presenters’ prepared remarks were obviously written before Friday’s non-farm payrolls number was released. The number (271k) materially exceeded consensus expectations, which left markets pricing in a higher probability that the Fed would act in December and raise the funds rate.
Bank stocks reacted positively to the news, with the prices of most conference participants’ stocks ending the day up over 2% (over half ended the day up over 3%). The price reaction was due to the fact that most banks will benefit from a rising Fed Funds rate, which directly influences the pricing of more than 60% of U.S. bank loans.
M&A / Capital Return
Given the slack loan growth experienced in recent years, combined with near-zero interest rates, banks have also had to focus on other strategies to deploy capital and maintain EPS growth. KEY was one of the presenters, and defended its recently announced acquisition of FNFG, which was not well received by the market (see our Insight “U.S. Banks: Two Significant Deals in Two Days Met with Market Skepticism”). Because two large deals were announced within the past week (i.e. NYCB/AF and KEY/FNFG), consolidation was discussed in nearly every presentation. Other banks were asked about their M&A strategies, with some providing clear metrics for their ideal acquisition target (e.g. staying in their footprint, deal size), while others were slightly more guarded in their remarks. Many banks were asked about dividends and buybacks, with multiple respondents declaring that those decisions will be dependent on the outcome of the regulator’s Comprehensive Capital Analysis and Review (“CCAR”) process next year.
Banks with energy exposure have seen the size of those books decline, coincident with the drop in energy values, and representatives from those companies used their time to assure the audience that they have provisioned accordingly for further credit issues.
Conclusion – Lower for Longer/M&A the Biggest Issues
The lower-for-longer rate environment, combined with increasing regulatory costs, is forcing banks to focus on the expense discipline and M&A / capital return in order to maintain EPS growth and subsequent returns to shareholders. In the views of many, the non-farm payrolls number released on Friday should provide the impetus for the Fed to act in December, which will hopefully be the first of multiple rate hikes, over the next several years, that will alleviate pressure on the banks’ bottom lines.