Survey by Grant Thornton
The results are in and the outlook is bleak. Grant Thornton's 15th annual survey of bank executives indicates that bankers are gloomier than ever about the economy. Only 1 in 10 bankers surveyed claimed to be optimistic about the economy, while 54 percent were pessimistic. In the survey's 15-year history, the numbers have never been this extreme. Just three years ago, for example, only 3 percent of bankers said they were pessimistic.
Many bankers are waiting for the real estate market to hit bottom and for the credit crisis to pass. At the same time, they're hoping they will be able to weather the storm. Sixty-four percent of bankers believe that the bottom will come after May, 2008. Another 17 percent are looking to 2009, indicating that the bottom won't come until after the close of this year. The housing bubble has been damaging to the banks. Homeowners have borrowed all their equity out through home equity loans; when the home values dropped, the equity was erased and banks were left under-collateralized. For March, the ABA reported a housing price decline of 3.6 percent from February, the fifth consecutive monthly decline.
George Mark and John Ziegelbauer of Grant Thornton predict that bankers will "tighten down the ship-tightening the underwriting and build liquidity." Many are getting back to the basics, citing the need to get to know their customers better as part of the solution. It's a smart move, one that will help the banks comply with the regulations, while enhancing cross-selling efforts.
Bankers are concerned about obtaining new customers while taking care of the ones they have. Credit unions pose a competitive threat, particularly with respect to business customers, which have traditionally been a core customer segment for banks. Maybe a renewed bank focus on customer service will result in depositors and borrowers feeling truly valued by their bank once more!
Bank capital is also in short supply and it is harder to raise capital in this difficult environment. Investors are looking for full disclosure of all the risks, including the loan portfolio and liquidity risks. When capital dries up, it's more expensive to acquire. Many banks are trading at or below book value, which, to the banker, makes it very hard to sell stock and let people in for such a discount.
All of these factors and many more are putting pressure on bank boards to understand what is going on in their own banks. Directors need to be proactive about uncovering any problems, rather than waiting for the regulators to find them. If the regulators find problems, it says two things: 1) the board does not understand what is happening at the bank, and 2) the bank does not have proper controls in place.
To download a full copy of the survey, simply click on the link.
Summary by Wendell Brock, MBA, ChFC