The Republicans were not as popular as the ‘Alex from Target’ meme yesterday, but it was enough for a strong win. Ironically, the party that has been in full obstructionist mode trying not to change anything now has to find a way to build consensus and govern for change. For banks, moving control of the Senate Banking Committee is said to be favorable, but we have our doubts as we see little public support for restructuring Dodd-Frank too much. Expect more Congressional pressure on the Fed to increase rates and a variety of bills that will attempt to exert more control over the Fed and its mandates (they won’t go anywhere). If there was a message last night, it is that voters hate politicians, they will take it out on the current party in power and it will likely be the same in two years. At the end of the day, Hillary Clinton just might be the biggest winner from last night as the pendulum will likely swing the other way by 2016.
Outside of politics, there are a variety of small changes that we see banks are taking advantage of that we publish today. Below are five ideas to consider that may make your bank more productive:
Get Your Bank On Apple Maps: Last week Apple opened up their self-service portal ( https://mapsconnect.apple.com/), so banks can add or edit their listing for their headquarters, branches, ATMS/Kiosks and loan/deposit production offices to Apple Maps. Bank representatives can log in with their Apple ID and input the information (don’t worry, it will be verified). Once complete, your bank will show up on Apple Maps, both online and on mobile as well. This will give you additional visibility around the community as well as make it easier for customers and potential customers to input your bank by name and have the address automatically pop up. While we are on the topic, if you haven’t done it yet, you can do the same for Google Maps, so you can be found on the largest online and mobile map. For an added bonus, cut this paragraph and send it out to your small business customers so they can increase their visibility as well.
Start Using the Fed’s Term Debt Facility: The Fed is starting to get more active with this monetary policy tool that will be used to drain Fed Funds liquidity, and your bank can benefit. The Fed borrows money on a 7-day basis and allows banks to cancel the facility at any time should they need the liquidity. Starting at 26bp, the rate is expected to increase to 30bp. Yes, it won’t make a big difference to the bottom line, but then again its free basis points that are risk-free. Dump all the liquidity that you can spare into the facility.
Buy Loans: Banks that need loan growth and diversification away from real estate should consider buying C&I loan participations from us. We use the credits to manage risk and support earnings and you can do the same. If you approve a loan today, you can own the loan tomorrow, which is unlike almost every program. We have some 25 credits that we have available so you can pick and choose according to your balance sheet, risk position and pricing needs. The loans are 3 to 5 years in term and are all floating rate around Prime. These are well-known names with less leverage than your average real estate transaction and a lower default rate than your average C&I credit from your area. You can review our credit and financial analysis to save time and effort. Want more information and to see the loans available? Go HERE.
Pick the Right Part of The Curve: In 2015, it will be time for banks to re-think the 5-year fixed rate adjustable loan pricing. Historically, community banks have taken the 5-year fixed rate, and in a declining interest rate environment that helped increase net interest margin (albeit at a slight cost of the strong borrowers refinancing into lower rates as market rates decreased, thereby decreasing credit quality). In 2015, the 5-year term rates represent more risk for community banks than ever before. The interest rate futures market expects interest rates to increase slowly in 2015 and 2016, however, rates are expected to rise quite rapidly in 2018, 2019 and 2020. In fact, the average bank’s cost of funding is expected to increase by 2.50% from today to 2019 and by 2.90% from today to 2020. That increase easily negatively impacts NIM to make many of those loans unprofitable for the remaining life. Given the shape of the current yield curve and the timing of future expected rate increases, banks would be better served steering borrowers into 3-year fixed rate adjustable.
The 3-year rate is now 60 basis points lower than the 5-year rate. Anything that banks can obtain on 3-year loans that are less than 60 basis points differential to a 5-year loan is incremental to profit and decreases interest rate risk. In fact, going out 3 ½- years can create a loan that for the borrower appears as long as a 4-year deal, but saves the bank 55 basis points in NIM contraction versus a 5-year loan. Less interest rate risk and substantially more profit can make a 3 ½- year loan more attractive for lenders that do not hedge their interest rate risk.
Budgets: The budget process is not only about projecting income, but it is a resource allocation exercise as well. Update your strategic plan first and then translate that into volume, pricing and margin assumptions. While making capital and expense allocations by particular geographies, product lines and customer segments will add complexity to the process, it will help the bank focus priorities which will make the effort well worth it. In addition, banks need to make sure that their asset-liability assumptions are consistent with their budget and are consistent on both sides of the balance sheet.
As we review bank’s budgets for 2015, most banks are budgeting a 6% increase in loan growth, a 4% increase in deposit growth and a reduction of costs slightly. As short-term rates are now expected to increase some 53 basis points next year, most banks are budgeting about a 25bp increase in cost of funds and are including 3% raises for staff in recognition that the labor market will continue to tighten. As you work with your budgets for next year, we encourage banks to include an R&D portion of the budget to help provide resources to work on new product innovation and believe it is important to increase marketing and advertising expenses to around 4% of total expenses versus the 2.20% range of where it is today. Banks are going to need a stronger brand and profile as competition for loans and deposits heat up.
Bonus Material – Free ATM Concept: Free ATMs rolled out in New York this week and is a concept that banks should consider. Processing fees are paid for by advertisements which users have to watch before they can withdrawal their money. There are about a dozen of these ATMs in shops, bars and deli and may present an interesting way for community banks to expand their ATM network should the concept catch on in other areas.
Submitted by Chris Nichols on November 05, 2014