Banking, Finance, Investments
Slowing loan growth, growing problem loans and tightening fee income are factors that could affect the performance of the state's banks and thrifts, analysts say. Although earnings are expected to grow a respectable 5% to 10% in 1996, bankers may not see the consistent double-digit growth many institutions enjoyed in the past few years.
"Earnings will be good, but not quite as much as [in 1995],'' predicts Benjamin C. Bishop, Jr., chairman of Allen C. Ewing & Co. in Jacksonville. As a result, banks and thrifts will continue to seek ways to lower costs, making more mergers and acquisitions likely in the coming year. While that may assuage bank stockholders, it won't do much to help bank employees, who will continue to see jobs eliminated and branch offices cut.
Bankers and analysts tie the health of the banking industry to the economy's health, which some believe is slowing after several quarters of strong growth. "I base my forecast on what's happening recently, and recently, even though the economy is growing at less rapid a pace than we've seen over the last couple of years, it's still growing pretty well,'' says Byron Hodnett, chief executive of First Union National Bank of Florida and president of the Florida Bankers Association.
Indeed, loan growth was about 9.9% nationally for the first six months of 1995. During the third quarter, however, it slipped to 5%, "so the rate of gain has slowed down but it hasn't disappeared," says John J. Mason, senior vice president of research at Interstate/Johnson Lane in Atlanta.
Since loan growth is the key to banking profitability, most analysts pay close attention to trends in this segment. In the coming year, many observers will watch for factors that could affect demand for commercial and consumer borrowing.
Consumer borrowing, in particular, could be fickle in 1996. Since Florida's economy is without the broad manufacturing base of other states, much of its loan demand rests with consumers. And these days, many of these consumers are feeling tapped out, burdened by debt loads they took on in 1993-95.
"Everybody has already bought the new car or new house," Ewing's Bishop says. "So the loan demand driven by the consumer markets is going to be weaker in 1996."
Other bankers see room for additional consumer loan growth. "People are acquisitive. It's still the American Dream to have the big screen TV and the family van. I think that will continue through the next year," says F.C. "Nick" Nixon, president of the Community Bankers of Florida and president of Tallahassee-based First Bank, a $60 million institution.
On the commercial side, most analysts expect continued demand for real estate loans, especially for multi-family and apartment projects.
And in the next year or two, analysts say demand for speculative office and industrial construction will finally return, as space tightens up enough in some markets that banks find it profitable to begin financing these projects again.
Another banking segment that will be strong in 1996 is the market for international finance. Foreign agency banks doing business in the U.S. will have a strong year if economies in Latin America remain stable, says Bowman Brown, an international banking lawyer in Miami.
"Loan growth and deposit growth will continue," agrees James Whisenand, a Miami international banking lawyer. Factors driving the growth include concern by companies about the U.S. economy, which fuels their interest in doing business overseas, as well as government agreements, such as the North American Free Trade Agreement (NAFTA), which further encourage trade.
But analysts say U.S. banks need to keep a close eye on problem loans at home. Some of the loans made during the early part of the recovery are starting to show signs of trouble, although nowhere near the levels experienced during the 1980s. "On the commercial side of the ledger, we're probably going to see some problems," First Bank's Nixon says.
And consumer loan quality is also showing signs of weakness, evidenced by growing defaults on credit cards, says William W. McGinnis, Jr., first vice president of Robert W. Baird & Co. in Milwaukee, Wis.
The good news is that most banks are amply reserved for bad loans, Mason of Interstate/Johnson Lane says. Even if some problem loans crop up, they won't make much of a dent in bank earnings.
Bankers agree that to boost profits, banks need to grow assets. But some analysts warn banks and thrifts may soon have trouble growing as much as they would like. That's because banks are having a tough time snaring deposits away from other investment sources which are paying higher rates for money. Deposits in the state's banks and thrifts fell from $188 billion in 1990 to $176 billion in 1995. From 1992 to 1993 alone, deposits slipped from $181 billion to $175 billion, according to the Florida Bankers Association.
One analyst, Richard X. Bove of Raymond James & Associates, says the shrinking deposit base will soon start limiting the ability of institutions to grow their assets through lending.
"Loan growth may be inhibited a little bit," agrees Interstate's Mason.
To counter that trend, banks might have to start paying much more for deposit accounts in order to lure back the money. "If banks make the decision to pay higher rates, the money will flow back," predicts Bove, a Raymond James senior vice president.
Of course, boosting rates paid on money cuts severely into banking profit margins, a point that Baird's McGinnis says will make banks pause before garnering deposits with higher rates in 1996. In 1995, "people needed deposits, so they bid them up but they didn't bring a lot more money in," McGinnis says. Now, "banks are being more cautious about chasing deposits."
Deposits aren't the only thing that could get squeezed next year. Analysts say fee income could also suffer.
In particular, banks will have a tough time boosting fee income on deposit and other accounts any further."Banks have probably come close to maxing out on fee income," says Samuel Beebe, an analyst with William R. Hough & Co. in St. Petersburg.
Investment mutual fund sales will continue to be a growth area, but "not enough to significantly boost revenues," Beebe adds.
And although many banks have pledged to boost income by focusing on lucrative areas such as trusts, "I really haven't seen it come through on the bottom line," says Deborah Beylus, banking analyst with JW Charles Securities in Boca Raton.
Nevertheless, trusts will continue to be a big focus for most banking institutions. As post-war veterans age and transfer their wealth to younger generations, millions of dollars will need to be managed and invested. Banks large and small are unveiling trust departments or beefing up existing ones to handle estate planning, tax advice and investment brokerage services.
Mark Stevens, chairman, president and CEO of Northern Trust Bank of Florida headquartered in Miami, says he's "very bullish about 1996." That's because Florida's aging baby boomers increasingly want professional money management and planning for retirement, he says.
Banks such as Northern Trust that offer trust services, private banking and investment advice should continue to benefit as long as they are willing to hire seasoned professionals and use technology to stay competitive in the increasingly crowded trust industry, says Stevens. He predicts most trust companies will see growth in the single-digit range in 1996, but expects his trust department to duplicate 1995's 12.5% growth rate. Northern Trust's total trust assets stand at $12.6 billion in Florida.
Bove of Raymond James is also critical of efforts by some banks to use capital to buy back their stock, thereby boosting the institution's stock price and earnings. Bove maintains the move is an effort by banks to prop up their earnings in the face of declining market conditions, and he warns the move could hurt banks in 1996 when banks find they need extra capital to grow their assets. "Banks won't be able to expand because there's not enough capital and not enough deposits," Bove warns.
But First Union's Hodnett downplays his concern. "I think people are buying in capital because they're saying, 'I'm not sure I can make profitable use of all the capital I have,' " Hodnett says. Because problem loans have been minimal up until now, "Banks have all this capital. [Buying stock] is really a sign of strength."
Maybe so, but what can banks do to lure back deposits?
Bove says banks already are making deals on fees to get deposits in the door. "Banks are going to corporations and saying, 'If you put X number of dollars in, we'll forgive your fees,' or they're going to consumers with their banking packages," Bove says. "What banks are saying is, 'We'll make a deal with you and cut your fees if you will give us more money.' " When banks cut their fees too much, it can result in sharply lower fee income.
Another way banks and thrifts can boost deposits is by making themselves a more convenient place to visit. The Community Bankers' Nixon sees supermarket banking as an important trend in the coming year.
Nixon's bank, First Bank, recently set up shop in a Wal-Mart Supercenter in Panama City. The 200,000-square-foot center has a grocery store, eyeglass center and a First Bank office providing a range of banking services seven days a week. The store's performance has exceeded Nixon's expectations. "We've had an exceptional response," Nixon says.
Banks are also unveiling home banking computer programs that let customers switch money between accounts, write checks and handle other transactions through their home computers. It's all part of an effort to make banking as easy as possible so customers will be more willing to keep their money in their banks. Most, if not all, of the big banks are expected to have home banking programs in place during 1996, and many smaller institutions are also planning to offer this service in the coming year.
And banks can boost profits by continuing to cut costs such as overhead, particularly in backroom operations, which don't directly contribute to banks' bottom line.
Nixon says a number of smaller institutions, including First Bank, are considering banding together to develop "consortiums" to ship backroom operations to outside companies. In a consortium of five banks, "it might take ten people to do their bookkeeping functions, whereas each of those banks may employ three or four people" in-house to do that work, Nixon says.
Big Get Bigger
Of course, other banks and thrifts will choose to keep costs down by boosting volume, usually by buying up the competition and instantly adding market share. Big banks such as First Union, NationsBank, SunTrust and Barnett Banks are only expected to get bigger.
And even though many of the choicest mid-sized institutions have already been gobbled up, there are smaller entities still to be bought in the $1 billion to $3 billion range.
Even community banks and thrifts will continue their merger activity, much of it intra-market mergers. That doesn't mean that smaller institutions will disappear from the map, however. On the contrary, many customers will disdain the big, high-tech superbanks in favor of the folksier community institutions, analysts say. "There's still a lot of opportunity for smaller banks and savings and loans to grow," Baird's McGinnis says.
Mergers will continue to be hard on banking employees, many of whom lose their jobs whenever banks need to cut costs by cutting back on expensive branch offices. "We still have too many banks and too many branches and too many people working in branches," Hough's Beebe says.
Wages are likely to remain stable "because bankers aren't looking for a reduction in the dollars paid to any one employee -- they're looking for a reduction in head count," Interstate's Mason says.
In some cases, wages may even rise slightly with inflation. For instance, First Union's Hodnett says his bank plans a 3.5% wage increase in 1996.
But for Baird's McGinnis, that may even be too much. Banks are facing formidable competition from non-bank sources, such as investment firms, insurance companies and a variety of credit card purveyors, all of which rely not on branch offices but on the telephone or computer to talk to their customers. To even the playing field, McGinnis thinks banks need to be much more aggressive about cutting overhead -- about 10% a year for each of the next five years.
"Banking used to be a relationship-driven business," McGinnis says, "but what the non-banks have been teaching bankers is that customers don't necessarily want or need to talk to a person."
If The Market Keeps Climbing ...
Nationally, the securities industry is expected to perform in 1996 about as well as it did in 1995, give or take 10% up or down, depending on how the market performs, according to Perrin H. Long, Jr., a top brokerage analyst who follows the industry for Brown Brothers Harriman & Co. in New York.
Thomas A. James, chairman and CEO of Raymond James Financial Inc. in St. Petersburg, is hopeful on the outlook. Continuing demand by baby boomers for retirement planning and money management is helping fuel interest in investing. And if the market for new issues remains as active as it has been recently, that will further stimulate trading and investing by clients, James says.
Florida's retirees always have made the state an attractive place for securities brokerages, says Long, noting that 62 is the average age of a brokerage customer.
Two years ago, New York broker Muriel Siebert decided she was tired of losing clients when they retired to Florida. So she opened a discount brokerage office, Muriel Siebert & Co. Inc., in Boca Raton. Just recently, she opened a Naples office and plans to open two more offices in 1996 in South Florida. "We're following our customers," Siebert explains.
Some Florida residents need help with the bigger picture, such as retirement planning and money management, says Harold Corrigan, Merrill Lynch & Co.'s district director in Palm Beach. And brokerage firms, like banking companies, are seeking clients wanting trust and estate planning services. Merrill Lynch is beefing up its trust department. Prudential Securities Inc. is re-entering the trust business and targeting Florida, among other markets.
With all this growth, it's not surprising employment is on the rise. By looking at a company's job growth, "You can measure what mode we're in," James says. And right now, Raymond James has 98 job openings -- about a third for positions in computer programming and support.
Nationally, Long says employment in the securities industry is rising, as are bonuses. It's a good time to be in the business -- as long as the stock market stays strong. Many industry observers say they wouldn't be surprised if a correction occurred in the coming year.
A sharp downturn in the market would, of course, dramatically affect the fortunes of the brokerage industry. Although most signs point to a good year, nagging uncertainties lead James to admit: "I'm on the fence."