We follow up on our regional banks white paper, applying our NLP platform to the full set of earnings calls from regional banks this quarter to explore the state of uncertainty before an expected rate cut on September 18th. Our rationale for close scrutiny of regional bank earnings calls holds true since our last publication as we find deceptive commentary indicating there may be underlying uncertainty regarding headwinds to net interest margins.
Amenity published a white paper on 29 July 2019 detailing our approach to using our NLP models and text analytics to estimate regional bank softness ahead of the Federal Reserve’s last rate cut. At that point, not all regional banks had reported earnings for the quarter. With another eleven regional banks having posted results since, we are writing to update you on the state of uncertainty going into yet another rate decision on 18 September 2019.
The rationale for close scrutiny of regional bank earnings calls holds from when we published our white paper. Regional banks remain a proxy for the real economic health and difficulties persist in gauging the tone and mood of the banking sector with traditional methods. Regional banks benefit from higher rate environments, so we expect these institutions to face mounting headwinds after the Fed’s last rate cut and in the aftermath of today’s expected cut. If this path continues, banks could end up in something of a margin squeeze. Unless they can cut rates paid to depositors, net interest margins (the difference between charges for loans and funding costs) may take a hit as rates continue to drop.
The figure above visualizes Amenity’s Deception Scores for all US regional banks whose executives were deceptive about topics including Net Interest Margin (NIM) and/or Net Interest Income (NII). We present total Deception Scores for each bank in blue, with the x-axis sorted from lowest to highest. In orange, we overlay the portion of each bank’s Deception Score that is attributable to Net Interest Margin as a topic. In yellow, we do the same for Net Interest Income. And in green, we do the same for margin (which we include as it is the highest ranking topic triggering deception in 3Q19 across all companies).
For the benefit of our readers, we include some illustrative extractions from two banks with the highest portion of their Deception Score attributable to questions focused on net interest margins below. We see these extractions as indicating there may be otherwise unrevealed uncertainty regarding headwinds on the net interest margin frontier for these institutions.
ServisFirst Bancshares (15 July 2019):
Civista Bancshares (26 July 2019):
To contextualize uncertainty regarding net interest margins, we looked to our Fundamental Model for evidence of positive sentiment extractions that relate to net interest margins as a topic. We found a small handful of examples, one of which is Allegiance Bancshares, Inc. (ABTX:US). Though we still find some latent deception in their most recent call (as we would expect in any other), we also find a handful of positive extractions related to net interest margins, which we detail below:
Allegiance Bancshares, Inc. (26 July 2019):
In a fluctuating rate environment that may present a squeeze on net interest margins, the ability to detect deception and simultaneously analyze sentiment around substantive headwinds and tailwinds offers analysts a clarifying lens in determining which banks are prepared for the chapter to come and which are not.
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Amenity Analytics is the industry leader in providing insights from unstructured text by using Natural Language Processing (NLP) assisted by Artificial Intelligence (AI) and Machine Learning (ML). Amenity’s NLP system is a sector-agnostic, language-dependent tool for quantitative text analysis that is deployed across the financial services industry and beyond.
This communication does not represent investment advice. Transcript text provided by S&P Global Market Intelligence.
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