Garnet Capital Advisors Blog

Banks are striving to generate loan growth amid stiff competition and low interest rates. At the same time, analysts and shareholders are pressuring these financial institutions to reign in their expenses where possible, according to American Banker.

Bank execs face dual pressures
This situation has created an interesting dilemma for bank executives, and Kevin Kabat and Richard Davis, the CEOs of regional lenders Fifth Third Bancorp and U.S. Bancorp, recently asserted that growth opportunities are scarce and require upfront spending, American Banker reported.

Fifth Third Bancorp and U.S. Bancorp are not the only regional lenders that are encountering challenges, as PNC Financial Services Group and SunTrust Banks recently reported that stubbornly low interest rates ate into their earnings, according to American Banker. At the same time, modest improvements in economic conditions helped push loan demand higher.

Rate increase predictions
PNC executives stated they expect interest rates to increase during the second half of the year, and incorporated this prediction into the company's 2015 outlook, American Banker reported. Rob Reilly, chief financial officer of PNC, commented on the situation.

"We believe the domestic economy will continue to expand at a steady pace. This is our basis for expecting higher interest rates during the course of 2015," he stated, according to American Banker. "However, we recognize the global macro factors are likely to persist and could prevail in delaying and/or diminishing otherwise anticipated rate increases."

Fifth Third's conservative stance
Amid these conditions, Fifth Third is being particularly conservative about lending growth, and Kabat stated during an interview that the company is holding high standards while many competitors offer generous loan terms and low rates in an attempt to build market share, American Banker reported.

"We have and will continue to make deliberate decisions not to add or renew loans at terms or pricing that would produce suboptimal risk return profiles," said Kabat, according to American Banker. "Where we believe both pricing and structure don't give you a lot of latitude for mistakes, we won't do that business."

Using this approach, Fifth Third recently reported its total loans grew 3.6 percent year-over-year, American Banker reported.

An alternative approach
In the current landscape, it is perfectly understandable for banks to be conservative about granting loans. Fortunately, there are ways to increase loan portfolio size without sacrificing credit quality. One way financial institutions can increase their loan portfolio is to buy pools of loans of known credit quality and often with historical performance available.

To ensure loan portfolio purchases reflect their investment objectives, banks should work with Garnet Capital Advisors, a loan sale advisory firm with decades of experience spanning many types of debt. Portfolios can be tailored to meet an individual institution's needs.