NEW YORK–Many banks expect the Paycheck Protection Program to act as a major revenue source over the coming months, while also helping existing borrowers who are at risk of defaulting and driving up already heavy credit costs, according to a new analysis released by S&P Global Market Intelligence.
S&P Global noted that based on loan size data released by the government to date, aggregate fees have averaged 3.1%.
“That would represent $20.3 billion in total fees based on the full federal authorization for the program so far, and a far better return than securities yields across a yield curve pinned close to the zero lower bound,” said S&P Global in its analysis. “Some banks say participation in the program, while requiring long hours and a Herculean mobilization of staff, involves modest direct costs, and that they are not concerned about potential liabilities. Some banks also hope to use PPP loans with new clients to peel relationships away from large competitors that angered borrowers with long processing delays.”
S&P Global added that in an environment marked by weak loan demand across many sectors, PPP lending stands as one of the few near-term opportunities. In its Form 10-Q on May 5, for example, PNC Financial Services Group Inc. projected that its average loans would increase 10% to 15% in the second quarter from the first quarter, reflecting $14 billion of lending under the small business rescue program, up from "high-single digit" growth it forecast just three weeks earlier.
“During its first-quarter earnings report April 24, Synovus Financial Corp. said that the program will become its ‘primary engine for loan growth,’” said S&P Global in its analysis. “On its first-quarter earnings call April 29, BankUnited Chairman, President and CEO Rajinder Singh said his company could be renamed ‘Bank of PPP’ for the month of April.”
The Earnings Math
Other examples cited in the S&P Global report:
- First Interstate BancSystem Inc. President and CEO Kevin Riley projected that his bank's net interest margin could increase modestly in the second quarter as PPP loans begin to be repaid. By the third quarter, however, "It probably could go north really fast because of all those fees being recognized," he said during a May 1 conference call on first-quarter results.
The Billings, Mont.-based bank, with $14.41 billion in assets, funded about $1 billion of PPP loans in the first round of the program, which it said generated $35 million in fees. That figure is equivalent to 7% of the bank's net interest income over the year through the first quarter.
- S&P Global noted the interest rate on PPP loans is 1%, which produces a modest spread against funding available at a rate of 0.35% through a special facility offered by the Federal Reserve, which many banks have said they plan to use. Still, banks have emphasized that the loans, since they are fully backed by the government, carry a zero risk weight for measures of regulatory capital, and some have described that core spread as an attractive source of revenue, S&P Global added.
- "We will get the funding [from the Fed] and a spread of 65 basis points, and it has no impact whatsoever on our capital," Chairman and CEO Jay Sidhu said on Customers Bancorp Inc.'s May 4 first-quarter earnings call. "So over the next two years, if 25% are not forgiven and they stay on our balance sheet, you would expect to see approximately $8 million more in annual...interest income." The Wyomissing, Pa.-based bank, with $12.03 billion in assets, said it had originated $5 billion of PPP loans directly and in partnership with financial technology companies. It said the lending would generate about $85 million in fees, which would equate to 28% of the net interest income it posted over the year through the first quarter.
- Banks have acknowledged that the program, and the revenue it generates, will be short lived, sometimes framing the earnings they anticipate as an offset to mounting credit costs. Prosperity Bancshares Inc. said PPP lending will be "very accretive" to EPS, but that some of the money will be channeled into loss reserves, S&P Global stated. "I wouldn't want you to count it, just extra found money," CEO David Zalman said on the bank's first-quarter earnings call.
- "PPP fees should be viewed as a positive earnings offset and source of capital at a time when provisions are building," analysts at Keefe Bruyette & Woods said in a May 5 note, according to S&P Global. They estimated that the fees would represent more than 30% of provision expenses over two years at more than a dozen banks, including Republic First Bancorp Inc., Customers Bancorp, Level One Bancorp Inc., Orrstown Financial Services Inc., First of Long Island Corp., Meridian Corp., Peapack-Gladstone Financial Corp. and OceanFirst Financial Corp.