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Revenue And Expense Observations In 2Q

More Banks Reach Positive Operating Leverage Than During Previous Periods

Looking back at the data for the majority of public banks who have reported their financial results, it was a solid quarter indeed for 2Q-2016. As of June 30, 2016, a healthy 70% of banks greater than $500 million in assets enjoyed positive operating leverage whereby revenues grew faster than expenses on a linked-quarter basis.

Revenues

This was a greater proportion of the sector than in 1Q16 or 4Q15 (i.e., using the same group of companies). As a result, the efficiency ratio improved with nearly the exact same figures since the math is directly related. The pace of spread revenue or Net Interest Income (NII) expansion was strong for nearly every size category except for the largest institutions above $50 billion.

Spread Incomes

Our impression is mortgage and SBA loan sales are significant components of total revenue growth, and comparisons should be available with FDIC call reports and 10-Q filings since other sources do not have sufficient breakdowns yet on a uniform basis. But, loan growth is clearly driving spread and NII increases which in turn supports the positive operating leverage.

Investors should not miss these trends.

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