How should banks determine the best way to proceed over the upcoming quarters? While no one can predict the future, there are several critical developments that anyone can keep an eye on. These are the areas that are most impactful to banks and for which they need to strategize and position themselves.
Rising Rates: Obviously, rates are rising but by how much? Banks should position for moderate hikes and a slower pace of hikes than the Fed predicts. The Fed predictions on rate hikes have been overstated for several years running. The yield curve for the 10-year Treasury is flattening as of late, which also indicates fewer hikes are needed. A reduced duration for assets and reduced call risk makes the most sense; but practice moderation and don’t overdo it. Too many banks had their net interest margin crushed by being too asset sensitive and waiting for rates to increase while we had eight years of low rates. Check your bond portfolio against a well-defined national peer group of banks with similar growth rates, loan deposit rates and liquidity needs. Very few banks perform this comparison. They just use uniform bank performance reports or a local peer group. Every basis point matters, and there is no reason to not be a top quartile performer.
Deposits: Buy and/or gather core deposits now. Branches provide the best value. Most banks overestimate what deposits are core deposits, meaning they won’t leave your bank when rates rise. Like capital, gathering core deposits is best done when it is least needed.
Mergers and Acquisitions: If you are planning on selling in the next three years, sell right now, as optimism and confidence are at 10-year highs. If you are a long-term player, go buy core deposits, as they are historically cheap and you are going to need them. They are worth more now than perhaps ever before.
Get Capital While You Still Can: Solve your capital issues now. Investors are probably overconfident, but banks have done well the last seven years and finally, they aren’t taboo anymore. Investors want to invest in banks. That always happens before something bad in the economy occurs, so get it while you can.
Real Estate Carries Risk: With regulators mindful of capital exposure and real estate deal availability being spotty, it’s best that banks be wary of deals in this area. Commercial real estate linked to retail is more and more being viewed as extremely risky. There is an all-out war being waged on store retailers by online retailers. Since retail is a huge sector of the U.S. economy, investment will follow the online trend. Industrial real estate has become “retail extended” with the least amount of real estate risk.
Beware of Relying on Credit Scores: Banks need to be careful of the credit cycle. Consumers are loaded full of debt. Cars and homes are too expensive relative to wages and affordability. Credit scores probably don’t capture the downside risk to the consumer.
Get Ahead of Your Risks: Cyber-risk is a major and very real risk. Get ahead of the curve. Two other areas bearing risk are 401(k) plans and wealth management areas as they are especially exposed to litigation and are a nightmarish mess to be addressed. 401(k)s are overloaded with too many choices, fiduciary risk, performance issues, excessive fees and conflicts of interest. Get help now or you may be painfully surprised.
Marketing: Your bank had better get creative with digital marketing opportunities for your website as well as mobile devices. Why? Billions are being invested into financial technology companies and it’s easier for fintech to learn about banking than it is for bankers to learn about fintech.
Millennials: Surveys from The Intelligence Group and others show that finding young, motivated workers, and then retaining them, may be a challenge.
- 45 percent of millennials believe a decent paying job is a right, not a privilege.
- 64 percent would rather make $40,000 at a job they love versus $100,000 at a boring job.
- 71 percent don’t obey social media work policies.
- Millennials are proving to be more loyal to employers than previous generations, and are better at multi-tasking than previous generations.
Hopefully, some of these items provide bankers strategic ideas to incorporate over the next two or three years.
Now is the time to chart your course.