The Connecticut retail banking sector enjoyed a strong year during 2016 and while many are reckoning on an even greater 2017, headwinds continue to blow.
Amid a flow of impressive fourth-quarter and full-year year earnings reports, Connecticut Bankers Association Chairman B. Michael Rauh Jr. is cautiously optimistic.
“I think calling it a great year might be a stretch, although it certainly has been improving,” said Rauh, who is also president and CEO of Groton-based Chelsea Groton Bank. The Farmington-based Connecticut Bankers Association counts 51 members, including Bank of America and Wells Fargo.
Rauh said a primary driver for improvement has been reductions in loan loss provisions, which is the money set aside by banks to cover troubled loans. That means consumers are finding it easier to cover their debts, including home loans.
A positive forecast for 2017
Recovering economies in Connecticut and nationwide along with a strengthening housing market have helped solidify bank earnings, said Prof. Masami Iami, chairman of the economics department at Wesleyan University in Middletown.
“These factors have made bank lending less risky and more profitable,” Iami said. “I would say that [the banking sector] will continue to do well in 2017.”
In the coming year, spending decisions by the White House and Congress will likely prompt action from the Federal Reserve, which in turn will impact Connecticut and its banks, Imai said.
“One needs to keep an eye on the regional economic impact of the aggressive spending policy that is to be implemented by the Trump administration and also on how quickly and aggressively the Federal Reserve adjusts the interest rate in response to it so as to stem inflationary pressure,” he said.
Banks are likely to earn more from higher interest rates, but there’s also a risk of economic slowing because of those rate rises, Rauh points out.
“The balance sheets of most banks are positioned to gain a little bit from rising interest rates, so long as long-term rates on loans rise more than the short-term rate on deposits,” he said. “It’s a double-edged sword, however, because rising rates are designed to slow the economy, which means lower demand for borrowing.”
Connecticut banks see success across the board
Connecticut’s big banks and small banks alike are fairing well in the current environment, earnings reports and banker statements show. Bridgeport-based People’s United Financial Inc., the largest bank based in Connecticut, posted record full-year net income of $281 million, up $20 million from the prior year.
People’s United has been acquiring assets in New York, including financial advisory Gerstein Fisher and Suffolk Bancorp, adding services and increasing its reach even further beyond Connecticut. People’s United has $41 billion in total assets and 400 banking offices covering Connecticut and five other states.
Waterbury-based Webster Financial Corp. had “its best year ever” thanks in part to a strong fourth quarter, Chairman and CEO James Smith said in Jan. 19 release. The fourth quarter featured a record $1.8 billion in loan originations. Net income available to common shareholders was $198.4 million, up $3 million from 2015.
“Credit quality remains strong with net charge-offs on loans at their lowest level in nearly a decade,” Smith said.
At $150 million in total assets, Collinsville Savings Society is one of Connecticut’s smaller retail banks, although it is part of the Connecticut Mutual Holding Co. that includes Litchfield Bancorp and Northwest Community Bank. Collinsville Savings President and CEO Gary Roman called 2016 “a better year, but not gangbusters.”
“I’m a lot more optimistic now than I was at this point last year,” he said. “We will have a better year in 2017.”
A strong stock market that soared even higher after the election of real estate mogul Donald Trump to the presidency helped Connecticut banks during 2016, Roman noted.
“Banks that have a lot of equity investments got a nice kick from that,” he said.
Collinsville Savings’ refinancings of residential mortgages slowed, Roman said. Looking forward, an improving job market will help with home sales, though Connecticut generally has less new development than most of other parts of the country, he said.
Connecticut Department of Labor statistics show that the financial activities sector, which includes finance and insurance as well as real estate, was up 2,000 jobs, or 1.5 percent higher, at 132,300 in December 2016 compared with a year earlier. The sector was the largest gainer by percentage for the period.
State-level challenges persist
Connecticut’s economy is not growing as fast most other states, including neighboring Massachusetts. The Connecticut job market still has not replenished the number of positions lost during the Great Recession that began in 2008. State budgets that continue to contain tax increases act as a brake on economic activity and banker exuberance, bankers say.
“The challenges that continue to face the industry are still the historically low interest rates, the increase in fixed costs associated with new regulations and increasing competition from unregulated and un-taxed businesses,” Rauh said. “While things are certainly better than they were in the depths of the most recent recession, the lack of business growth in the state, coupled with a shrinking population and uncertain tax environment, make it hard to gain a lot of momentum.”
“But I’m deeply concerned about the economic issues and I know my colleagues are, too," he said. "As bankers, we’re all rowing in the same direction.”