Can banks really grant enough loans to counter the pressure on margins?

A large number of banks are trying to defend their margins by granting more loans.

The median loan portfolio of small and medium-sized banks covered by Keefe, Bruyette & Woods rose 5% in the second quarter, the investment bank estimated in a recent client note. That would be an acceleration from the 4% growth in the first quarter.

Several management teams have pledged to press for even more loans to offset the pressure on margins resulting from the rate cuts. The median net interest margin of the small and medium-sized banks covered by KBW contracted by 4 basis points in the second quarter.

Bankers have warned that variable rate loans will reset faster than deposits. The refinancing activity also picked up, increasing volume but suppressing loan returns.

“We’re going to work to offset the squeeze with growth in assets,” said Craig Dahl, CEO of TCF Financial, a $ 47 billion asset in Detroit, in an interview. TCF recently made a merger with Chemical Financial.

Pinnacle Financial Partners in Nashville, Tenn., Will also look to generate more loans as it negotiates reset levels with large commercial depositors, said Harold Carpenter, chief financial officer of the $ 26.5 billion company. dollars.

“We expect double-digit loan growth for the remainder of the year based on current pipelines,” Carpenter said on the recent Pinnacle earnings conference call.

Industry experts will follow the third quarter results to see how banks are handling their margins.

Expect a lot of press for higher lending volume, Nathan Race, analyst at Piper Jaffray, wrote in a recent note to clients, adding that banks that produce “above average” loan growth have the better chances of preserving their margins.

Old Second Bancorp in Aurora, Ill. Intends to be part of this group.

Each rate cut could reduce Old Second’s margin by 3 to 5 basis points, CFO Bradley Adams said on the company’s second-quarter earnings call with assets of $ 2.6 billion.

“Loan growth will become much more important to us as the outlook for short-term rates has changed, but we believe we have a significant opportunity ahead of us on the growth side,” Adams said.

Banks will need to balance adding more loans while keeping an eye out for possible credit cracks, industry watchers have said.

Several banks credit problems reported in the second trimester, broadly calling them isolated incidents. At the same time, the bankers let loans flow in the riskiest segments.

“The competition is intense, and you don’t want to get caught up in this and start making loans that are going to come back to you and hurt you later,” said James Bradshaw, analyst at Bridge City Capital.

The economy is still growing and default rates remain low. These factors, and the lack of other tools to boost margins, make a decision to “increase volume … a reasonable strategy,” added Bradshaw.

ConnectOne Bancorp in Englewood Cliffs, NJ, is moving low-yielding multi-family loans as part of a push for more business and industry relationships. The company’s margin on assets of $ 6.1 billion fell 4 basis points in the second quarter, to 3.30% on June 30.

“I believe competitive pressures will persist, but we are seeing positive signs and taking action to maintain our margin,” Frank Sorrentino, CEO of ConnectOne, said on his company’s earnings conference call.

While the competition is “fierce,” Kevin Cummings, chairman and CEO of Investors Bancorp, with $ 27.1 billion in assets in Short Hills, New Jersey, said demand was strong enough that the banking sector provides more loans.

“Our pipeline is strong, and it’s positive,” Cumming said in an interview. “Everyone is looking for business assets. … People are looking to diversify their portfolios and get more of this key middle market client.

“We are very confident that we can compensate [margin pressure] with the growth and the pipelines we have and increasing net interest income, ”said David Dykstra, COO of Wintrust Financial in Rosemont, Ill., during his company’s quarterly call.

The increased lending effort is expected to help Wintrust’s $ 33.6 billion asset “prepare for when the yield curve turns more favorable,” Dykstra added.

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