Every year I attend a large conference for bankers which focuses on the perennial decision to remain independent, consolidate smaller banks or merge with a similarly-sized or larger bank. These conferences provide a good forum to catch up with CEOs, CFOs and directors of our client banks, other industry professionals and bankers to get a sense of what is on their minds.
Here are the common themes I heard in networking at the most recent conference:
- Lending opportunities continue to be limited (particularly for commercial real estate and business loans) while pricing and overall terms remain very competitive, confirming what RP Financial clients nationwide had been sharing with us. The bankers I spoke with were CEOs and CFOs of some of RP Financial's client banks from Arizona, Arkansas, Florida, Georgia, Maryland, Massachusetts, New Mexico, and North Carolina, which tells me it's a challenge throughout most markets in the U.S.
- The scarcity of lending opportunities is causing the loan-to-asset and loan-to-deposit ratios to decline. With reduced utilization of wholesale funding, bankers see limited opportunity to shrink the balance sheet given the desire to retain deposit customers, resulting in greater liquidity and search for yield in investment securities in today's low rate environment. But of course those investment opportunities are few and far between given that banks can only buy so much BOLI and rightfully don't want to increase interest rate risk for only small rewards.
- Operating expenses have risen due to increased regulation, more intense risk management processes and elevated cybersecurity efforts. Few expected that operating expenses will ease as the forces leading to rising costs are viewed as permanent changes. Bankers and bank professionals were nearly unanimous in their view that increased size through merger was essential, as there remain significant headwinds to organic growth.
- Nobody I spoke to doubted the accuracy of one presenter's chart that showed ROAA for a large group of banks in their research universe has declined almost 20% to about 90 basis points for the post-financial crisis period (2010 - 3Q2015) compared to the pre-crisis period from 2000 -2007. Over the same periods, the median ROAE declined by over 40% from 14% to just over 8% post crisis. Margin compression and regulatory overhead were cited as the primary factors. The sharper decline in ROAE compared to ROAA was driven in large part by the higher capital levels most banks now operate with. From many recent strategic, business and capital planning engagements and board planning meetings I was involved with, I believe that hardly any banker sees getting back to pre-crisis ROAE levels; in fact most would be quite pleased if they could ever get back to 10% and thrilled with 12%.
It was no surprise that conference attendance has increased in recent years, particularly of community banks facing the challenge of producing adequate returns for shareholders. Prospective sellers want to take advantage of improved pricing multiples, while buyers are focused on leveraging capital and strong regulatory standing to have the option of enhancing shareholder value through an acquisition(s). Both groups realized that they probably had to accept that they were either a buyer or a seller as few of the bankers I spoke with thought that going it alone was the solution!