Banks and businesses alike are tightening their belts in anticipation of a 2023 recession.
“As we head into a recessionary period, it’s like we’re getting prepared for battle, in a way,” said Michael McMahon, Buffalo market president for KeyBank. “We’re focused more on the defensive than the offensive.”
Banking leaders in Buffalo say they’re adjusting their strategies as the global economy shifts.
In KeyBank’s most recent quarterly middle-market survey, mid-size business owners reported that 2022 was a strong year for growth, but they see clouds on the horizon.
Business leaders who thought a recession was coming last year are now anticipating it sometime in 2023, but there’s a bit more optimism now than there was six month ago, McMahon said.
“The concern about the magnitude and timing of a recession has changed — it feels like for the positive — although it’s still at the front and center of every conversation,” he said. “Labor and inflation concerns remain very high up.”
As a result of high inflation, business owners say they’ll be raising their prices and considering automation and layoffs to cut costs. However, even as they cut costs, many will raise wages in response to the ongoing labor shortage.
At KeyBank, the expected recession means a cautious approach to commercial lending.
“We’ll go into an expense-saving mode,” McMahon said.
While growth will still be an objective, it will take a backseat to portfolio management for a while, he said.
The bank will focus on lending to businesses in industries it knows well in order to manage its credit risk. Lenders will be more cautious and more likely to say ‘no’ to untried businesses in the near future, he said.
“That’s the tough part of our job, because we’re not always able to say yes,” he said.
In an attempt to fight inflation, the Federal Reserve has raised interest rates to levels not seen since before the Great Recession. Many companies have never had to deal with high interest rates, said Kevin Quinn, chief commercial banking officer at Five Star Bank. It remains to be seen how they will respond.
He said all banks will be taking a “sharper look” at commercial lending opportunities heading into 2023.
“The challenge has been the pace of changes,” he said. “The landscape has changed dramatically in the last two or three months.”
The commercial real estate market saw strong growth in 2022, but that’s expected to slow this year due to high interest rates.
“Some deals no longer pencil out,” he said.
However, this could lead to some real estate bargains for those with the patience and the means to wait for them, he said.
“It’s not all just threats, there’s a lot of opportunities during a recessionary period as well,” he said.
Western New York’s economy tends to be sturdier than that of the nation, which means less upside during boom times but less hardship during busts, Quinn said.
Many businesses already slimmed down their budgets during the pandemic, making them better equipped to handle a downturn, he said.
He expects plenty of Buffalo businesses to survive and thrive, even if there’s a recession.
BankOnBuffalo CEO Michael Noah said an economic downturn could bring opportunity.
“To be honest, that puts us in a great position,” he said.
BankOnBuffalo, a subsidiary of Pennsylvania-based CNB, moved into the Buffalo market in 2016. As a relatively young, relatively small bank, Noah said it can react more quickly to economic pressures than more entrenched competitors.
BankOnBuffalo saw an increase in business during the economic turmoil of the early pandemic. The bank focuses on one-on-one relationships with business owners, and that personal touch is an advantage in uncertain times, Noah said.
“Our bank was able to pick up relationships because of that,” he said.
BankOnBuffalo’s philosophy is to “lend into management,” doing business with trusted, proven borrowers, many of whom have already weathered economic turmoil.
“A lot of these business owners, they’ve been through Covid, they’ve been through recessions, they’ve been through difficult times in the economy,” Noah said.
McMahon also spoke to the importance of building relationships between bankers and borrowers. Bankers should be proactive, looking for potential problems before they happen, rather than reactionary, he said.
“In good times we should know what’s going on and in bad times we should know what’s going on,” he said. “It just takes more time when times are bad.”
He said bankers should be consultants first and salespeople second, working with borrowers to find the best financial solutions.
The fundamentals of banking remain the same, he said, no matter the economic forces at play.
“It’s not rocket science and we’re not reinventing the wheel; there’s just more balls in the air,” he said.
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