The View From The C-Suite: Growing Pessimism

At the end of each of the past five years, Cornerstone has surveyed senior level executives in mid-size banks and credit unions to gauge their perspective on the coming year, and to identify their business and technology priorities for the following year.

In the 2019 report, we postulated that the party may be coming to an end. The party, of course, was the improving (if not booming) economic conditions fueling lending (and even deposit) growth, and the relaxing of the onerous regulatory environment imposed by the previous administration.

Although just a minority of executives are downright pessimistic about 2019, the change year-over-year shows a marked decline in the percentage who are either somewhat or very optimistic.

Why the change in optimism? Cornerstone Advisors President and Co-founder Steve Williams surmised:

“The drop in optimism from executives picked up steam late in 2018, as the triple threat of slowing loan growth, higher funding costs and early credit softening concerns translated in to some of most fragile forward earnings projections in years. The growing industry volatility is showing in the diminishing confidence  banks and credit unions have in hitting earnings growth targets for 2019.”

Bank and credit union C-level execs weighed in with their opinions as well:

“Liquidity will become more challenging as rates continue to rise and savers increasingly seek higher yields, moving to money market funds and high yield savings accounts. More banks and credit unions will introduce online high yield offerings, increasing upward pressure on cost of funds. I’m also more concerned about household debt and the impact of a potential economic slowdown.” (David Mooney, Chief Executive Officer, Alliant Credit Union)

“Where we’re at in the economic cycle, there’s interest rate volatility, hyper competitive commercial and commercial real estate loan terms, and headwinds for fee income.” (Archie Brown, Chief Executive Officer, MainSource Bank)

“Reasons for pessimism: 1) Concern that Fed will raise rates beyond what is warranted, as it has so many times in the past. 2) Next Congress appears poised to ratchet the political 'food-fight' to a higher level rather than be prepared to address substantive economic and governance issues. 3) Emerging markets weakness and geopolitical tensions to continue to put a pall on the economy. 4) While capital levels are higher than 2006-2008, credit risk management discipline continues to slip.” (Douglas N. Biddle, Chief Financial Officer, Bank of the Pacific)

Not all execs are pessimistic, however:

“The opportunity ahead with all things digital expands the opportunity for community banks willing to shift and take advantage of it. It will require a very different approach than what banks have been used to, most likely different leadership, a different view on risk, more aggressive with technology, different people and different ways of thinking. If we get after it, the future is bright!” (Kathy Strasser, EVP/COO, River Valley Bank)

“I am optimistic about the banking industry in 2019 mostly because of the huge opportunity that digital innovations give institutions to serve their members and customers. It’s an exciting time and it requires some out-of-box thinking and a leap of faith in order to move forward.  I am also excited about the changing rate environment and the opportunities and challenges that come with it.” (Jim Norris, Chief Executive Officer, Montgomery County Employees FCU)

This isn't to say that the optimists don't have their share of concerns. They do, but they differ from the pessimists. The pessimists are concerned about the economy, interest rates, and growing deposits. The most optimistic execs are concerned with attracting talent, cybersecurity, and growing customers/members.

2019 is shaping up to be a challenging year for the banking industry. despite a bunch of positive economic indicators—including unemployment and wages—the downward trends in the stock market are causing concern. Interest rates are poised to rise (finally), making liquidity difficult, and putting upward pressure on banks’ cost of funds. Credit card default rates are increasing, in particular for mid-size issuers.

In addition, the regulatory changes that FIs expected to see after the 2016 presidential election never really materialized, and with the Democratic takeover of the House in the 2018 mid-term election, banking-unfriendly politicians will re-occupy the banking committee.

And while the threat of fintech disruptors has morphed into the promise of fintech partnerships, let’s be realistic: Few mid-size FIs have the resources and skills to enter into more than one or two partnerships, and even those partnerships aren’t likely to produce significant benefits in 2019.

I hope to tell you that I was wrong after we field the What’s Going On in Banking 2020 survey.

To download a copy of the What's Going On in Banking 2019: Is The Party Over? report, click here.

Ron Shevlin
Director of Research
Cornerstone Advisors