Associated Banc-Corp (ASB) Rides on Rates, Asset Quality Ails
Associated Banc-Corp ASB is likely to be supported by higher interest rates, robust loans and deposit balances, strategic expansion and business restructuring efforts. However, elevated expenses and deteriorating asset quality are concerns.
Associated Banc-Corp’s net interest margin (NIM) is likely to improve in the upcoming quarters as the Federal Reserve will keep interest rates high in the near-term. However, rising funding costs will likely weigh on margins. In 2022, the metric expanded to 2.91% from 2.39% in 2021, driven by higher rates. The momentum continued in the first half of 2023. We expect NIM to be 2.80% in 2023.
ASB’s organic growth strategy is driven by its robust loan and deposit balances and efforts to improve fee income. Though revenues took a dip in 2021, it witnessed a compound annual growth rate (CAGR) of 2.9% over the five-year period ended 2022. The uptrend persisted in the first six months of 2023. The inclusion of higher-margin lending portfolios and digital investments as part of its strategic plan announced in September 2021 are expected to bolster revenues. We expect total revenues (FTE adjusted) to grow 4.6% and gross loan balance to rise 6.6% in 2023.
In order to continue its focus on core operations, ASB is restructuring its business. In 2020, the company divested the insurance business, Associated Benefits & Risk Consulting, while in 2021, it sold its wealth management subsidiary Whitnell & Co. ASB has been into inorganic expansions as well. It acquired First Staunton Bancshares in 2020 and 32 branches in Winconsin in 2019. These deals continue to be accretive to its earnings.
Similarly, headquartered in Columbus, OH, Huntington Bancshares Incorporated’s HBAN acquisitions remain a major contributor to its top-line growth. Over the past few years, the company has significantly expanded its operations through acquisitions. Such efforts will aid HBAN to gain significant market share and improve profitability.
However, persistent rise in non-interest expenses is a concern for Associated Banc-Corp. Expenses witnessed a CAGR of 1% over the last five years ended 2022. The growth persisted in the first six months of 2023. Owing to the inorganic growth efforts, digitization, investment in franchise and inflationary pressure, expenses are expected to remain elevated. We expect total non-interest expenses to rise 3.1% in 2023.
Likewise, another company in the banking space, Commerce Bancshares, Inc. CBSH, has been witnessing a steady rise in non-interest expenses. Expenses recorded a CAGR of 2.7% over the past six years ended 2022. The trend persisted in the first six months of 2023. With investments made for technology upgrades amid inflationary pressure, overall expenses are expected to remain elevated for CBSH.
Another key issue to consider is Associated Banc-Corp’s deteriorating asset quality. The company witnessed a rise in provision for credit losses in 2022 and the first half of 2023. The asset quality is expected to weaken further, given the expectation of a worsening macroeconomic backdrop. We expect provision for credit losses to surge 187.4% in 2023.
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