Don't Panic: 4 Signs the Banking Industry Is Improving

US Bancorp CEO Richard Davis gave investors surprising advice on how to tell the banking industry is moving back to business as usual.

Feb 13, 2014 at 7:00AM
Richard Davis Us Bank

Richard Davis Source: U.S. Bank

Banking CEOs have been vocal about the significant headwinds facing the current revenue environment. We have seen, however, year-over-year improvements in net income through cost cutting, tighter lending practices, and the exploration of new revenue streams.

In US Bancorp's (NYSE:USB) fourth quarter conference call, CEO Richard Davis explained that these types of practices won't last forever. And investors should begin to look in four counter-intuitive places for signs that the economy is improving.

1. Sentiment improves
"But sentiment is always the leading indicator, right?"

While investors should normally take anecdotal evidence with a grain of salt, recessions often strike like hurricanes and we never see them coming. They wreak panic and chaos -- and then things calm. Is it just the eye of the storm? Or are we free to step outside?

Sometimes all it takes is one credible source to step outside and say, "Hey, I think we're OK."

Whether, in the case of the economy, it becomes a self-fulfilling prophecy or we are actually coming out of the woods, hearing a number of CEOs, including Richard Davis, say sentiment is stronger than it has been, and people are more "willing to talk about future investments" is a good sign nonetheless.

2. Deposit growth slows
"The first trigger in that transition of people spending is the deposits actually going down."

Total Deposit Growth-2009 to 2014
Company  Percent increase Total deposit growth
US Bancorp 43% $76 billion
Bank of America (NYSE:BAC) 13%  $128 billion
Huntington Bancshares (NASDAQ:HBAN) 21% $8 billion

Source: Company filings. 

From the chart above, we can see total deposit growth has been strong for all three banks since 2009.

And while Davis explained deposit growth is great because it means new customers, it's better for banks to see deposits begin to slow -- which, hopefully, means customers are starting to extend lines of credit.

According to Davis, though, "We are not seeing as much of that yet as we like to at the early stages."

3. Net charge-offs increase
Cutting costs and tightening loan practices were completely necessary following the financial collapse -- in fact, according to the Office of the Comptroller of the Currency, or OCC, 83% of banks surveyed in 2009 tightened retail lending practices.

Net Charge-off as a Percentage of Total Loans 
Company 2009 2014 Percent change
US Bancorp 2.30% .53%  (77%)
Bank of America 3.60% .87%  (76%)
Huntington Bancshares 3.71% .43%  (88%)

Source: Company filings.

With that in mind, Davis told investors not to be disappointed when charge-offs increase and provision for loan losses build up rather than being released. Davis went on to explain, "That's actually a pretty good sign that we are all getting back to doing what we are supposed to do, which is make loans to qualified people and every once in a while one doesn't get paid back."

To that point, the OCC reported 22% of surveyed banks in 2013 eased underwriting standards for retail underwriting. This is a trend investors should hope to responsibly continue.

4. Banks offering better rates to customers 
Davis suggested this recovery is, "[D]ifferent than almost any other recovery coming from a recession, [in] that it will not be the consumer that blinks first."

Normally, the banks with the best margins are the best investment -- and to some extent, that is still the case.

Davis explained, however, consumers aren't going to come back own their own, so business will need to garner interest through innovation and better rates. This may shrink margins. 

What lies ahead? 
Over the next several quarters, it's very possible banks total deposit growth will slow, net charge-offs will increase, provisions for loan losses may build up, and bank's margins may shrink to take advantage of low rates.

And while many investors may panic, smart investors will know we are returning to an economy where banks can begin taking some risk again. And that is a great sign that the economy is recovering.

Big banking's little $20.8 trillion secret
Do you hate your bank? If you're like most Americans, chances are good that you answered yes to that question. While that's not great news for consumers, it certainly creates opportunity for savvy investors. That's because there's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banking model. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. For the name and details on this company, click here to access our new special free report.

Dave Koppenheffer has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America and Huntington Bancshares. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers