Bank Director asked executives to identify three primary causes behind the current economic crisis. Many bankers cited loose underwriting practices, plus the political mandate to increase homeownership, inadequate oversight in the mortgage industry, and an insufficient understanding of risks associated with certain financial practices.
Bank organizers, who are either purchasing or starting up a bank, can pull a few “lessons learned” from this insight. Clearly, it’s easy for underwriting standards to slip under the pressure of larger industry trends. Therefore, once an institution’s lending strategy is defined, bank executives should be conscientious about adhering to that strategy. Community banks that maintained their underwriting discipline throughout the mortgage boom are now able to operate with a distinct competitive advantage—namely, a relatively clean balance sheet.
There is another lesson in the admission that many bankers didn’t understand the risks associated with their own activities. As Bank Director President TK Kerstetter points out in the survey report, “banks and boards have a lot of work to do in the area of enterprise risk management.”
A majority of survey respondents indicated that consumer confidence in the industry has declined. That’s really no surprise, given the speed at which consumers pulled their deposits from IndyMac and WAMU last year. But bankers themselves also admitted their own confidence was lacking. Seventy-six percent of respondents said they were pessimistic about the outlook for banking in 2009. In 2008 and 2007, only 54 percent and 21 percent of respondents were pessimistic about the banking outlook.
Bankers are also preparing for increased loan losses in 2009; 66 percent expected an increase in commercial loan losses, while 54 percent expected an increase in consumer loan losses.
The majority of respondents expect the credit crisis to wane towards the end of 2009 or sometime in 2010.
Acquisition and organic growth expectations
About one-quarter of respondents said their institution would pursue the acquisition of another bank or financial services company in 2009. And 13 percent of queried executives expected to sell or close offices this year. Only 22 percent had plans to expand by opening new branches this year—this figure is substantially lower than what was reported in prior years’ surveys.
A more uniform response resulted when bankers were asked about their strategies for organic growth in 2009:
• 80 percent expect to increase cross-selling initiatives
• 77 percent expect to pursue new customers with existing products and services
• 38 percent expect to build the bank’s online presence
Risk-aware management, capital levels key to survival
At year-end, 47 percent of survey participants expressed interest in the TARP Capital Purchase Program. This figure would likely be lower today, however, since the Obama administration has subsequently mandated executive compensation limits on banks receiving government assistance.
Going forward, bankers will be focused on managing credit risk, interest rate risk and portfolio risk—while working to maintain adequate sources of funding. Deposits will be the primary funding source, but the outlook there is uncertain. Experts are split on whether today’s more conservative consumer will save more or (due to unemployment) save less.
Overall, the survey responses largely present a back-to-basics mentality for the banking industry. As the survey report explains, “Community bankers, in particular, have faith in the guiding principles that have kept their customers and communities strong for decades.”
Source: The Sixteenth Bank Executive Survey, A Grant Thornton LLP study produced in association with Bank Director magazine. http://www.grantthornton.com/staticfiles/GTCom/files/Industries/FSandFI/Bank%20Survey/Grant%20Thornton%2016th%20Bank%20Executive%20Survey.pdf