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.
Please note: This in no way represents investment advice. All transcript text provided by S&P Global Market Intelligence.
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.
"It’s a good question. I don’t know. It’s just hard to predict rates. Everybody has kind of cut back on all these special rates to a degree. We can’t go dropping rates and everybody else do the same. I don’t have a great answer for that right now..." – William Foshee, CFO
"...we don’t see anything -- I don’t know if significant is the right word, but there are not going to be big improvements in our margin." – Richard Dutton, COO
"I guess short term -- I don’t know what you’re looking at long term, but short term, I’m looking at the next quarter or maybe the -- potentially the next 2 quarters with a 25 to 50 basis point decrease, I think it’s going to contract -- it’s going to minimally contract less than 5 basis points." – Dennis Shaffer, CEO
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:
"I’d like to note, expansion to the NIM during the quarter is a real credit to our broader team, working really diligently to reprice our loan portfolio over the past year, and it has been of real good help relative to the creep of cost of funds." – Paul Egge, CFO
"This quarter was a great quarter as it relates to the positioning of our funding mix and as a result, we saw a nice pickup in NIM." – George Martinez, CEO
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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Transcript text provided by S&P Global Market Intelligence.
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