To watch in 2023:
Many in banking may have to work harder and smarter next year with loan demand likely to be lower than this year, but there are multiple reasons the industry can weather the storm.
Takeaway from 2022:
Banks are much better capitalized today than they were prior to the Great Recession of 2008, due in large part to the regulatory measures that have since been enacted.
Banks are only as strong as the economy they operate in though, according to one local banker.
Banks are preparing for softening loan demand, along with other results of elevated interest rates. Strange economic times will effect Birmingham specifically, and banks are currently thinking about other headwinds in the industry, such as needed investments in technology and more.
“I do think there are going to be less opportunities in the market because of all of these factors going on,” said Nelson Bean, division CEO of Synovus in Birmingham. “So a banker that’s out trying to generate business is going to have to work a little harder and smarter to find the opportunities because there are going to be less.”
Bean said he can’t recall a time when interest rates have risen as rapidly as they have in the last year. But these rates aren’t unprecedented.
“When I started in banking, we were running projections with an interest rate assumption of like 18% or 19%,” he said.
Scott Latham, president and CEO of the Alabama Bankers Association, said he heard of one community banker in the state whose average loan pipeline was $80 million six months ago. Earlier this month, that banker’s loan pipeline was at $30 million. Latham said he heard of one mortgage banker who closed over 400 loans in 2021 and was down 72% over the last roughly four months.
“Most all of my members are saying something like this: ‘We really anticipate quarter one and quarter two to be gut-wrenching,’” Latham said.
That’s not to diminish the fact that banks will be making more on the loans they do score. But it may mean having to work harder and smarter for fewer opportunities.
“I know that they’re discerning a lot more,” Latham said. “They’re probably not going to go out and hire a new lender with loans trending in the way they’re trending right now.”
Scott Reed, chairman and CEO of Oakworth Capital Bank, agreed it is reasonable to assume overall demand for money will be softer next year as a result of the Fed’s actions, which have also affected the other side of the equation for banks.
“All the while the competition for deposits has grown a bit more intense because of what the Fed is doing,” Reed said. “For the first time I can recall in my banking career, the treasury bill is probably one of our biggest competitors.”
Reed said that is because rates for treasury notes have risen faster than deposit rates.
All in all however, the recession some are predicting next year is supposed to be mild, if or when it comes. Banks are better capitalized now than they were in 2008 for regulatory reasons. And because of the nature of the local market, a potential recession may not hit Birmingham as hard as elsewhere in the country because of its diversified economy.
“The reality of a market like Birmingham is, it has not been, in the past, a boom and bust economy. It’s been a very stable economy over time,” Reed said.
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