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BirdsEye View

 As the year begins to wind down and budgets to firm up, the economic outlook hasn’t cleared out much.  Robert Albertson, Chief Strategist of Piper, Sandler, remained undaunted, although unclear.

There are five NEVER BEFORE’s, says Robert.

1.  Rising rates in a growing economy.

2. Unsustainably low rates for the last decade plus.

3. Pandemic shut down the global economy, which is still affecting us.

4. Ukraine war and its impacts on exports.

5.  Unexplainable dynamics of workforce shrinking participation rate.

Too many unprecedented developments make predicting the future, even the very near future, most difficult.

There are several economic factors to consider:

1. The economy is decelerating from 6% growth in 2021 to under 2% growth this year, with anticipated stagflation in 2023.  The Fed’s quantitative tightening is beginning to take effect, while consumer spending will wane by yearend or shortly thereafter as they drain the COVID grants in their savings accounts.  The commercial sector is experiencing downward investment trends and is expected to continue that trend into 2023, and the labor force is extremely tight and not expanding.  Strong loan demand will not persist as all the trends above take fuller effect.

2.  Inflation is becoming in-moored. Commodities, general pricing power, wage growth, labor shortages, various bottlenecks including transportation and 6%+ inflation will take their toll on the economy in 23023 and beyond.

3.  Where Fed Funds will land is anyone’s guess.  Our CEO group Collectively predicted 5.5%-6% by June 2023.

4.  The regulatory environment for banks is increasingly worrisome, making it harder to get things done.  Fed, SEC, OCC and CFPB  leads are less centrists than their predecessors.  The regulatory environment remains unfriendly, particularly on M&A.

The 3Q22 earnings season is also wrapping up, and the following themes are emerging:

1.  Net Interest Margins sharply exceed estimates.NIM gains of 30-40bp are now common due to rising interest rates, favorable asset mix changes and low (unsustainable) deposit betas.

2. Net Interest Income is also exceeding expectations, buoyed by robust loan growth, typically in solid double digits led by commercial and accelerating credit card receivables.

3.  Bank managements confirm resilient consumer spending, although many are hinting at a likely slowdown next year as access pandemic-related savings are being drained.

4. Deposit growth has decelerated markedly, with expectations for negative balances going forward while deposit betas expected to rise to 30-40%.

5.  Credit performance continues to astound, with  many reporting declines in delinquencies.  At the same time, banks are commencing building their loan loans reserves in anticipation of a meaningful downturn sometime in 2023.

6.  AOCI-driven declines in tangible equity ratios are typically ignored by managements but get in the way of M&A pricing activities, and eventually could impact TCE ratios below regulatory tolerance.

In conclusion, 2023 is shaping up to be a year of mixed trends and contradictory forces, with an overall leaning toward the negative: a stressed economic environment, difficult regulatory posture and pricing pressures on deposits including core deposits.  This is a year where laser-sharp focus on execution and efficiency will yield the performance differentials we are all looking for, while maintaining and intensifying risk management across the board, with special focus on credit and regulatory risks.