Nancy Bush

NAB Research, LLC, is a Georgia-based consulting firm specializing in providing strategic advice and market intelligence to financial industry participants. NAB is not a registered investment advisor and is not affiliated with any brokerage firm or hedge fund.

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Bank Statements

The State Of the (Banking) Union

So, now we know. As our new and wholly original president is showing us on every available occasion, these are not “normal” times. The conventional deportment and graciousness toward the opposition that we have come to expect from our Presidents—even those, like Barack Obama, who could at times barely conceal his contempt for his Republican opponents in Congress—have gone missing in the Trump White House, as has any discernible trace of a unified political philosophy or a coherent plan for governance for the next four years. All we know at this point is that President Trump will “make America great again”, build a “beautiful wall” on our southern border, get the “bad hombres” in Mexico, and do away with big trade pacts. Beyond those tropes, it’s all a mystery, and subject to change with the latest Tweet.

If I sound like a disgruntled American right now—well, that would be about right. As my friends know, I was not a Trump supporter in last year’s race, agreeing as I do with Graydon Carter’s (editor of Vanity Fair) assessment of Donald Trump as a “short-fingered vulgarian.” But even given my reservations, I must admit that a big part of me was excited on the morning of November 9 to see that the media consensus had been proven entirely wrong and that the Washington political class had received one huge blinding jolt. I was particularly happy that two political dynasties—the Clinton and the Bush families—had been swept away in one fell swoop and that hereditary politics in America was likely at its end.

I was also very hopeful that there would at least be a chance for the achievement of some conservative goals—a commonsense revision of the tax code, some relaxation of the more onerous parts of Dodd-Frank, and most significantly, a revision of the Affordable Care Act that would allow people like me to have a low-cost catastrophic option for healthcare. But even after a State of the Union address that has been hailed by many as “transformational” in its content and its tone—is there hope?—the twin issues of Russian influence in the Trump administration and Congressional recalcitrance in getting legislation passed have raised their ugly heads yet once again, making the achievement of even a few policy advances less likely in the very near future.

Luckily, at a time that the nation’s political infrastructure seems to be fractured and creaking, the American financial infrastructure seems anything but. The banking industry—with or without Dodd-Frank revision—is continuing to slowly regain profitability back to double-digit returns on equity and 1%-plus on assets, and the banks remain cost-focused even as the prospect for better revenue growth looms. In addition, while the actual text of banking regulations may take some time to change, as one industry observer has pointed out to me, the tone of enforcement can change quickly and usually does as the political winds change. (This time, there has been a hurricane.) The result will surely be a friendlier regulatory posture toward the banking industry and some breathing space for the banks.

Indeed, a March 1 Wall Street Journal article titled “Bankers Are More Upbeat About Banks” detailed the ways that bank CEO’s are now seeing a brighter outlook for their industry. (The fact that this optimism is coming concurrently with a 10-year high in bank stocks is, of course, not coincidental—this has always been an industry where senior management was heavily influenced by Wall Street sentiment.) The upshot of the WSJ article was that better conditions for the banks and accelerated earnings growth would likely result in a change of emphasis for bankers away from returning capital to shareholders to expanding lending and reinvesting in some businesses—like trading— that have been denied capital in recent years, as well as upgrading branch networks that have been allowed to languish in the low-rate years when consumer deposit gathering was barely profitable.

All well and good—I mean, when is reinvesting in one’s core businesses not a good thing? But I must admit that—after nearly 35 years of covering this industry—when bankers get enthusiastic, I get distinctly uncomfortable. The WSJ article brings up the possibility of doing large-scale acquisitions, and while the possibility of the nation’s largest banks buying other American banks is remote—I do not see a lifting of the 10% national deposit cap as a possibility—there are still lots of ways that bankers can get into trouble when given enough rope to do so. While a Jamie Dimon might have the smarts and expertise to add capital markets-related businesses internationally, very few of his competitors do, and I’m hopeful that they will resist the temptation to do uneconomic deals, especially acquisitions in locations where they have little historical experience.

And ditto for the large regional banks and the community bankers as well. The CEOs of the large regional banks may have opportunities to do significant “transformational” mergers, but I would point out that such deals in the past have come with high prices and have produced dubious outcomes for shareholders. I continue to believe that a major contributor to the Great Meltdown was the long string of “synergistic” deals that forced the big banks to go further and further out on the risk curve to try to recoup dilution from unwise transactions. (Look no further than First Union’s purchases of The Money Store and CoreStates for proof on this point.) While the large community banks here in the Southeast are making hay with a series of transformational deals, they are using a very highly valued currency and are generally sticking to their knitting in terms of the places that they will go and the types of banks that they will buy. However, even they will likely be cautioned by regulators should the pace of deals heat up much more today’s robust pace and orderly consolidation become an issue.

I also have to ask this about the stated intention of senior bank managers to further expand their balance sheets. To whom would you like to lend that you are not lending to today? The banking industry is presently growing loans overall at a mid-single digits pace, with commercial lending growing more briskly. Which businesses or consumers are not getting loans? Will the small business sector be the beneficiary of a loosening of regulatory scrutiny? Will there be a greater emphasis on home equity lending as the housing market continues to recover? And can all this be done without a return to some of the shoddy lending practices of the past?

Are we about to enter into some Golden Age of banking that will show us that the move in bank stocks since November 9 has been justified? I do not have the answer to that question. I fervently hope that the hard work done by the banking industry since the bleak days of 2008 will finally pay off in robust loan growth, better net interest margins, healthy trends in fee income, and continued devotion to cost control. And I hope that this Golden Age will pay off not only for shareholders but for depositors, who have been so badly treated by the Bernanke and Yellen Fed. I have hope—but 35 years have also taught me to have a healthy degree of skepticism. Caveat emptor.