Chief Investment Officer
Commercial Loan Automation
outlook for 2018
As I sit down to write this article I question whether it should even be written. General sentiment is so positive all across the board that it is hard to say anything that will create value to my readers. Nevertheless, I will attempt to do just that.
We already know the economy is flourishing, and expectations for next year are strongly positive. The Conference Board’s composite economic indicators continue to show much optimism, and they are far more informed than I am. At the same time, I get worried when most opinions across the board point in a single direction.
With that caveat in mind, here are what I see as the central themes for next year:
- Strong loan growth
Economic growth and overall positive outlook will yield robust loan demand. We have seen these factors in play in 2017, and 2018 promises to bring forth more of the same. As my friend Robert Albertson, Chief Strategist for Sandler, O’Neill, says, the likelihood of a systemic credit issue across the board is low for this upcoming year.
The President’s tax cut is largely already built into market expectations, but the major infrastructure spend he promised is not. That initiative, should it materialize, will further fuel economic growth broadly across the country, and, with it, additional loan demand.
Accordingly, loan demand system-wide should experience upper single digit to low double digit growth in 2018. Many banks’ budgets already assume this level of loan growth, and I believe the market will make their stretch projections possible. The days of achieving loan growth solely by snagging customers from competitors are over.
- Deposit pressures
Deposit growth lagged loan growth in 2017. Some regions already started experiencing deposit pressures, and the bounty for a new checking account (albeit with some strings) has breached the 4 digit mark in a few locations. While the system is flush with liquidity, should loan growth expectations materialize, deposit growth would not be able to keep pace.
Our forums’ member banks are approaching 100% loan-to-deposit ratios in the aggregate. In the past this was less problematic as the regulators’ definition of acceptable liquidity was broader than it is today. Reliance on wholesale funding is far less acceptable than it has been in years past, and certain deposit categories have been classified as “wholesale” in a puzzling fashion (e.g. student deposits in university relationships).
The cumulative effect, I believe, will be a budding deposit crunch. I do not expect the rate wars of 2006 yet, but some pressure on customer deposit acquisition and retention. The universal banks have a significant advantage in the mass market, given their self-service technological edge and robust mobile offering. Smaller banks will have to make strides in the small business space as well as consider revamping their municipal relationships and deposit-rich segment focus. Localness can work well in deposit gathering when it is effectively employed and coupled with some technological innovation.
- Payments’ landscape will continue to shift.
Zelle was created in 2017, and adoption has been staggeringly fast, given the huge market share of its founding fathers – the major banks. At the same time, Venmo’s market share also continues to grow, while Apple is planning to introduce an Apple-specific P-to-P money transfer service in 2018. I’m not smart enough to predict which innovation will be a major disruptor this coming year, but one thing I know – it WILL happen.
How can we defend against the unknown? By listening better to our customers and developing our own specific solutions to burning customer needs and pain-points. Considering shortening time-to-market and overall fulfillment time lags across the board is an important opportunity for all of us. Technology already exists to help al banks streamline operations across the board, from account opening to loan originations, funding, servicing and closing.
No bank should go through 2018 without considering opportunities to improve the customer experience and internal efficiencies in high- frequency tough points and major product categories.
- FinTech disruption will continue; it can help or hinder us – it’s up to us.
Technology continues to evolve rapidly, and it is incumbent upon all of us to envision ways in which it can be incorporated into our daily operations and thinking.
There is a reason why Money 2020 is the most attended financial services conference in the country. It touches on the areas of highest potential and highest threat to every bank. Developing a deeper understanding of current technology thinking and its potential applications into banking services – production, marketing, distribution and delivery – is essential to every bank’s success in the medium term.
I know most banks believe their market is different and that their unique positioning and delivery teams largely immunize them to the effect of emerging disruptors. I urge you to find out what percent of the mortgages in your market were opened by Intuit, as well as what volume of small business and consumer loans was booked in non-banks. You may find the results surprising.
The use of technology should not mean the end of your business model as you know it. On the contrary, it should enhance your business model and make it more efficient. Technology is our friend, not our enemy, because smaller banks can inject the personal differentiator into their technology offering in a way that large banks cannot.
- Clarity around your business model and strategy will be critical to success.
BB&T’s CFO shared in a recent interview the bank’s strategy over the past five decades. I found that enlightening. Here’s what he said:
In the 1970’s – Envision or die
In the 1980’s – Differentiate or die
In the 1990’s – Grow or die
In the 2000’s – Restructure or die
In the 2010’s – Disrupt or die
The impressive part isn’t necessarily the content, but the clarity and crispness of the strategy and the challenges facing the company during the period. Sweeping strategic actions followed these simple statements, and the company’s prosperous survival is a testimonial to the success of this approach.
Every one of us faces similar challenges, but we might not respond to them as crisply. We should. Marshalling all resources toward a unified direction is more critical than ever, and 2018 is a great year to start – or intensify – this commitment. Other aspects – distribution strategy, technology budget, compensation philosophy, organizational structure, product lines, all follow this first step: defining the challenges the company is facing and determining the strategic approach to tackling it. This approach doesn’t discard the past but rather builds upon foundations laid over decades; at the same time, it embraces change as needed and progressively envisions the successful company of the future.