Occupy Wall Street protesters aren't the only ones with a new aversion to banking. Bankers themselves have some concerns. Just ask Joseph Vitale, a partner at Schulte Roth & Zabel who advises financial institutions and their investors. "Many community- bank officers and directors are finding themselves in a changed world," says Vitale. "Running a local financial institution has traditionally been a prestigious job, helping to do things like fund community and commercial development." With lending scarce and foreclosure rates high, and both the public and regulators looking for somebody to blame, community-bank officials are more likely to be vilified than lauded. "They're worried there will be protestors picketing in their backyard," Vitale says.
Finance chiefs might be forgiven for wanting to join the protest line. After all, it's hard to maintain friendly feelings toward a partner that pulled your credit line just when business went bad. Emotions aside, though, most executives recognize that their fortunes are inextricably linked with banks'. What they really want is for financial institutions to get their house in order. Commercial banking has to perform well enough to attract investment if it's going to invest in borrowers.
But it seems certain that the wheel of fortune will take its sweet time putting banks on top again. Even if the European Union saves the skin of Greece and other "peripheral" countries, and U.S. economic growth picks up, commercial-banking CFOs are going to have a trying time in 2012, even without further public demonstrations of animosity.
Historic, perhaps long-lasting, shifts like equity-market volatility, ultralow interest rates, and new federal regulations are rattling banking's foundations. How does a bank increase revenues and profits when margins are tight, underwriting standards are high, and loan demand is tepid? How does it attract capital without the improvement to portfolios that a recovering economy might provide? And how do retail banks resurrect lending volumes without the aid of a mortgage refinancing boom?
"This is not going to be the best year for banks," admits Frank Baier, CFO of North Jersey Community Bank in Englewood Cliffs, New Jersey. "Absolute profitability will be down, due to what's going on with the yield curve; regulatory pressures will increase expenses; and having to hold more regulatory capital will cause returns to decline."
"From a local market and economic perspective, unemployment will be the anchor on the economy," says Terry Freeman, CFO and chief operating officer at Private Bank of Buckhead in Atlanta. "The demand for loans and credit will stay flat."
All this comes when bank CFOs face lower revenues as a result of new rules, such as limits on overdraft fees. For "systemically important" financial institutions, there are higher expenses for constructing wind-down plans, or "living wills," in the event of a sudden collapse.
True, many of the new costs of loss-absorbent capital and tighter regulations have yet to hit banks' financials. Indeed, earnings look bright. Portfolio credit quality is improving on average, so many banks are reducing their provisions for loan losses, which can boost total income. "The [bad loans] have pretty much washed through the system," says Bob Martins, a CFO partner at professional-services firm Tatum. Loan write-offs at all Federal Deposit Insurance Corp.–insured institutions in the first six months of 2011 were $62.2 billion, versus full-year figures of $187.2 billion in 2010 and $188.8 billion in 2009.
But those numbers mask the core business question of how banks are going to cultivate new income. "Revenue for banks has not really grown in three years," points out Lee Kidder, a senior consultant at bank adviser CCG Catalyst.
Controlled Loan Growth
Banks are highly liquid right now, but they are not highly confident in the U.S. economy; their CFOs preach caution. But they are not about to pull back from lending again. "We've lent through the cycle, and continue to show loan growth in excess of peers," says Steve Boyle, CFO of TD Bank, the U.S. arm of $665 billion (in assets) Toronto Dominion Bank. "So we want to be cognizant of the risk, but also consistent. We don't want to react in a knee-jerk fashion to the uncertainties out there."
At North Jersey Community Bank, total assets and loans increased 20% and 29% year over year, respectively, in the first quarter of 2011. But as much as finance chief Baier desires growth, it has to be profitable.
Instead of ratcheting up consumer and business deposit and service fees, North Jersey is looking to add additional lines of business that are not dependent on rate spreads — a smart move with a base of cheap deposits. North Jersey plans to increase residential-mortgage origination and then sell the loans in the secondary market to create gains on sales, for example. It also hopes to add products like wealth management and annuities.
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