Statistics can be helpful, especially when you have the history and commentary to see trends and impacts. Understand the metrics included in our banking industry benchmarks key performance indicator (KPI) report more thoroughly with our insight into some of the current KPIs.
Loans to deposits
Although consistently rising throughout 2015 and early 2016, this measure of a bank’s ability to effectively deploy its deposit liquidity into loans has stabilized just below 80 percent. Although this is a reasonably favorable level, it is tempered somewhat by limited demand for additional credit in the markets traditionally served by community and mid-sized regional banks.
While credit quality continues to improve (see Allowance for loan and lease losses (ALLL) to Total loans and leases) the opportunities to expand credit portfolios have leveled. Uncertainties related to tax and regulatory reform, as well as the pace at which interest rates may or may not rise appear to be contributing to this leveling of credit demand. Likely to a lesser degree, but nonetheless real, the reemergence of financial technology (fintech) companies into the small business and personal credit markets has added challenges for banks to maintain the desired levels of credit in comparison to their overall liquidity.
Net interest margin
The average net interest margin for this segment of the banking industry continues to move upward toward pre-credit crisis levels. Most notably, it appears that the effect of interest rate increases driven by Federal Reserve actions have had more of a positive effect than anticipated. Where banks have been able to benefit from the effect of these increases on their investment and credit portfolios, the negative effect of rising costs of deposits does not yet appear to have been realized.
Businesses and consumers seem to be more willing to maintain existing deposit relationships in favor of pursuing marginal increases in yield, thereby forestalling any extensive competition for deposit gathering. Also, as noted above, because of less than anticipated growth in credit demand, banks are not currently motivated to increase their deposits through offering competitively higher rates.
Always a challenge for community and mid-sized regional banks, the average efficiency ratio for this segment of the industry continues at levels notable higher than that of larger, more diverse banks. In addition to the relative size issue which spreads costs over a smaller base of earning assets, the continued requirements for regulatory compliance and capital levels drive the efficiency ratio to these higher levels.
Also, community and mid-sized regional banks continue to work to increase the level of non-labor intensive fee income, which improves the efficiency ratio by providing additional revenue contributions without a corresponding increase in the cost structure. Advancements in service models and technology platforms are likely to be aggressively pursued in an effort to improve the efficiency of the earnings model for banks in this sector.
For more information on this topic, or to learn how Baker Tilly’s Value Architects™ can help, contact our team.