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• W1514588496 abstract "What 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. …" @default.
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• W1514588496 date "2006-09-01" @default.
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• W1514588496 title "What the First Half Tells Us about the Second" @default.
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