NEW YORK (TheStreet) -- As the new year swiftly approaches, the banking sector is facing a lot of "what if" scenarios. For many banks and their investors, the most important unknown is how, when and where they will be able to make loans in order to turn a profit.
Recently, bank executives have been expressing increasing optimism on the lending front, particularly with commercial and industrial (C&I) loans, as corporations cautiously put their toes in the water. This is positive news given the sluggish pace of economic recovery and the transformational changes making it harder for banks to earn money as a result of the financial crisis.
"Banks need to make loans; bottom line," says Michael Rose, vice president of equity research at Raymond James & Associates. But given the economic uncertainty, the big question is -- "are customers going to need to borrow? We've all read that corporations are flush with cash and they can draw down that first before they need to go out and borrow at least on the loan basis."
Rose continues: "Banks are trying to make loans, but remember particularly in the Southeast, the banks still have credit headwinds to deal with. They're not out of the woods yet. Things are getting better... but loan balances [are] pressured."So what if lending doesn't pick up next year? Banks will not always be able to rely on improving credit costs and reserve releases to boost earnings. Loans are the backbone of any institution -- large or small -- as a significant portion of a bank's business is interest income. Industry observers are predicting marginal loan growth in 2011, which will not bode well for banks that are in desperate need of revenue. With that said, true revenue growth at the banks - and with that investor confidence -- will remain stagnant until loan growth picks up, particularly for regional banks. The smaller banks have fewer levers to pull as opposed to the large and multinational banks in terms of business diversification. They are also still battling credit headaches in asset classes like residential housing, construction and commercial real estate. To be sure the big banks are still dealing with problem loans as well but are able to offset it better.
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