The first half of 2016 was not a good one for the Wisconsin banking industry, as its profits fell sharply from the prior year.
Net income at all FDIC-insured Wisconsin banks was $518 million in the first half of 2016, down from $614 million in the first half of 2015, according to the FDIC’s Quarterly Banking Profile.
Despite the dip in profits, lending was still up 5 percent year-over-year. That’s been a consistent trend – lending activity has risen steadily among Wisconsin banks over the past several quarters.
In the first half of 2017, federally chartered Wisconsin banks reported $80.3 billion in total loans and leases, up from $76.8 billion in the first half of 2016.
And the quality of those loans improved. Noncurrent loans and leases were 0.93 percent of total loans and leases, down from 1.15 percent last year.
The Wisconsin Bankers Association pointed out lending grew in virtually every category in the second quarter.
“As the state has seen positive economic growth and an historically large workforce, we’ve seen increased loan activity and improved asset quality,” said Rose Oswald Poels, president and chief executive officer of the WBA.
And the pace of lending activity is not expected to slow down, as the economic picture continues to trend positive and the Federal Reserve is poised to continue steadily raising its federal funds rate. That’s good news for banks that have been seeking larger margins on loans for years.
Now may be a good time for business owners to lock in low interest rates on long-term loans, even on their personal balance sheets, said Doyle Butkiewicz, market manager for J.P. Morgan Private Bank in Wisconsin.[caption id="attachment_327828" align="alignright" width="150"] Butkiewicz[/caption]
“It’s a very low interest rate environment considering history and borrowing money today for a longer period of time, because rates are low, is something people are thinking about,” Butkiewicz said. “And that can tie back to things like mortgages.”
A mortgage, line of credit or credit facility, borrowed now, would secure a low rate for a long period of time, he said. As borrowers think about their personal net worth over time, it may be smart to borrow now for things like investments, another home or completing a home remodel to reposition their balance sheets.
“As far as borrowers repositioning their balance sheets, we see that in the bond market and for larger corporations certainly, though that has been a regular occurrence over the past several years, since interest rates have been low for quite a while,” said Joel Huffman, senior portfolio manager and investment managing director at U.S. Bank in Milwaukee. “The condition of the lending environment has been strong and continues to be supportive of borrowers. A ‘goldilocks’ environment of continued economic growth, low and stable nominal interest rates and low interest rate spreads over Treasuries encourages companies to borrow if they so choose.”
Huffman said despite the federal funds and short-term interest rates increasing, long-term interest rates have actually decreased since the beginning of the year, providing more of an incentive to lock in the lowest possible rate.[caption id="attachment_327829" align="alignright" width="150"] Huffman[/caption]
“I think everybody’s looking at: how do they protect the balance sheet in case rates go up?” he said. “Rates have been low for a long time and lots of prognosticators have predicted rising interest rates and it really hasn’t happened.”
The lending environment should remain favorable to borrowers for the foreseeable future, Huffman said, unless there is a change in underlying economic conditions.
“One of the things we want to be aware of is inflation and could wage growth impact that,” he said. “Although the economy has been doing pretty well, wage growth has been modest.”
Despite wage pressures, though, inflation is expected to remain modest.
“It’s a good environment to be a borrower,” Huffman said. “Obviously, they need to be comfortable with the level of debt that they’re carrying on their balance sheets, but it’s much better than the opposite, where rates are rapidly rising or we’re heading toward a recession, and we don’t see either of those things on the near-term horizon.”