Geopolitical instability (Syria, North Korea, Venezuela, Hong Kong, Saudi Arabia, etc.); U.S. and China trade wars and tariff battles; here in Michigan, the ultimate impact and reverberations of the recently concluded (hopefully) GM/UAW labor strike; Brexit or Brex-not, and how that decision ripples through Europe; the potentially prescient nature of the 2yr/10yr inversion a couple of months ago in terms of the yield curve’s historical ability to accurately foresee a coming recession; the next moves at the Fed – up, down or sideways – coupled with their most recent initiative in buying short-term Treasuries, that appears to be a case of “Quantitative Teasing” on top of its “mid-cycle adjustments”; and, continued strong employment numbers counterbalanced by recent weakening in the manufacturing sector, and its potential to spill over into the critically-important services sector.

Is a slowdown coming? Are we possibly already in the early stages of one? Or, is it relatively smooth sailing (with the occasional bump in the road) as we close-out 2019 and move through 2020 and beyond?

Whatever your current view – that a recession is imminent, or conversely that a recession is still further-out on the horizon – there is ample empirical evidence and anecdotal commentary to comfortably support either position. Consequently, I care not to opine on what I may see, but rather simply look to reinforce that recessions are a way of life in U.S. economic cycles and, as J.P. Morgan Chase chairman and CEO, Jamie Dimon, has said often in the past, “you shouldn’t run your business hoping there won’t be one.” Human nature that often leads to “hearing what you want to hear and seeing what you want to see” can become a bit challenging at the moment given the proliferation of cable news and talking heads looking to out-shout one another. So, be sure to routinely take a step back and assess the dynamics in your markets to take a more sober view of what may lie ahead. Harness the resources of your team in continuing to facilitate honest and candid discourse within your organization. From a risk management perspective, such dialogue could and should prove invaluable over time. As I often heard from a respected, long-time, since-retired Midwest-based bank CEO, “if you have/see a problem, let’s talk about it, so it becomes OUR problem to address and resolve. If you don’t talk about it, and it escalates, then it becomes YOUR ____ (insert any expletive you deem most appropriate).

Clearly, a very bullish note would be the continued current outperformance of the banking sector as reflected in recent earnings releases. Most institutions are easily meeting or beating consensus estimates, while in tandem reporting tempered loan growth. Still relatively healthy growth, nonetheless, underscoring continued stable economic underpinnings, while hopefully not demonstrating a lack of discipline in trying to grab late-cycle credit opportunities. Solid fundamentals (prudent growth, sound expense control, strong capital levels, possibly a bit of pre-slowdown reserve building, ongoing cultivation of sustainable fee income sources, etc.) should remain the focus. In my equity research days, I never lost sleep when organizations within my coverage universe stuck to their knitting and continued to display the basic blocking-and-tackling that had largely built the healthy foundation of their existing franchise value. The at-times refrain, “this time is different”, rarely proves to be. Stay focused. Stay disciplined. Remain prudently opportunistic. Protect and preserve your culture. It’s a marathon….not a sprint.

John Allison, Chairman of the high-performing and highly-valued $15 billion Home Bancshares in Arkansas, and over the years a candid yet thoughtful executive when commenting on the industry, recently spoke about the “decline” in the company’s loan growth during the 3rd Quarter. Referencing situations he had not seen since the Financial Crisis, as it relates to cut-rate pricing and looser underwriting standards, he talked about how his organization had “walked away” from significant additional volume in an effort to remain focused on quality versus quantity. One statement he made stuck with me: “This is a time to move cautiously. Banks have spent the last 10 years building their balance sheets with quality, high-yielding assets, and (emphasis added) we could destroy all the good we built in much less time than it took to build it.” His message, while potentially antithetical to Wall Street, is to remain disciplined and not simply worship at the alter of growth that investors can often demand. In that vein, I am somewhat encouraged that the market seems to be rewarding institutions as they release Q3 numbers if their core fundamentals remain robust even if loan growth is no longer hitting double-digit percentage levels. Maybe a requisite pause is occurring that now champions a more measured, and prudent, long-term perspective in the financial sector. And in doing so, it would seem to potentially dovetail with a continued extension of modest, sustainable economic growth in the U.S. for the foreseeable future.

And as it relates to the earlier reference concerning the inverted yield curve and its somewhat unsettling historical record of having accurately forecasted the last seven recessions in the U.S., here too maybe exogenous factors could be blunting the efficacy of this event. First, the inversion itself was short-lived, and seemed largely influenced by recent activity at the Fed. And, worth noting, I heard a reputable Wall Street investment strategist at an economic luncheon the other day posit: “in light of the prevalence of negative yields in both Europe and the Far East, is it possible that investors simply searching for quality and yield may be artificially driving down the long-end of the curve as they pour into our Treasuries?” Interesting, and logical; but I also still hear that aforementioned refrain, “this time is different.” Hence, I tread cautiously and simply harken back to an admonition I made last month:

Maintain underwriting integrity and discipline. Manage capital and reserves carefully. Emphasize sound risk management practices and a robust architecture. You are stewards of your shareholders’ investment. The constant, for successful banks, has been adhering to solid credit standards and sound cost controls. Whatever is on the other side will, inevitably, pass. Do what you need to do so that when it does, you are still standing.

In closing, attached please find our monthly summary of Michigan’s financial institutions. As you and your Board take your organization forward, please do not hesitate to reach out to me and/or my colleagues at ProBank Austin if we can be of any assistance in helping you assess the competitive landscape. My best wishes for continued success as you close out 2019 and enter 2020.

 

OCTOBER 2019 MICHIGAN BANKING SUMMARY