The Fed promising to be on hold through 2013 means there’s little aspect for relief in interest margins and rates. The credit recovery we’ve seen is starting to wane … so really it’s all about profitability at this point, and that’s a tough picture.
The smaller you go in the banking space, the more spread-dependent you are and the less diversified your revenue stream is.
Are small banks better off growing or shrinking loans?
- The Fed’s zero interest rate policy is causing a lot of the more creditworthy small businesses to just pay down loans.
- Credit worthy borrowers is an issue.
- The uncertainty of regulation and it’s cost are affecting small business loans.
Deposits are still being accepted, it’s certainly a real problem for net interest income growth.
Where should small banks look to find fee income?
The banking industry will lose around $12 Billion in debit card fees this year. Quite a bit of income to make up in this economic environment.
- Some banks are adjusting fees for checking account balances. Requiring a higher average balance to avoid monthly fees.
- Some banks are looking at providing asset and wealth management services. Experience and execution will be critical if they go down this path. Nobody likes losing money.
92 Banks have failed this year, down from 2010. 2012?
- With the FDIC dragging their feet on shuttering these failing institutions, it makes it hard for investors to come in at that point to bale out the institution.
- Since early 2007 – 510 banks have “imploded.”
- U.S. Home Prices Fell More Than Forecast. “Residential real estate prices dropped more than forecast in the year ended October, showing a broad-based decline that indicates the housing market continues to be weighed down by foreclosures.” This will affect banks that have real estate portfolios.
For the stable banks that are already at the 9% to 10% capital level, they’re going to be throwing capital off. You’re looking for the best managers to use the capital to acquire others, and you’re looking for the bad managers to make sure that they’re not doing anything else and they’re returning it to the shareholders if they’re generating capital from a good franchise.
What are the biggest challenges for community banks in the next 12 to 18 months?
- The smaller you are, the more difficult it is incrementally to absorb costs.
- If we are hit with another recession…not so sure we’ve come out of the last one.
- Banks are just running out of some levers they can pull. How far can you cut expenses?
- Competition. Banks that are better marketers using Social Media to increase brand awareness, and meet customer expectations at point of need.
- Mergers and Acquisitions; Stand alone, merge or acquire.
Is this the new normal?