As the Holidays rapidly approach, there is great news as we deal with the pandemic! Congress just approved a nearly $900 billion stimulus deal, including $600 individual payments, a $300 boost to federal unemployment insurance benefits, increased funding for vaccine distribution and Covid-19 testing, and a roughly $284 billion extension of the small business Payment Protection Program (PPP). Here in Michigan, the state legislature has approved a $465 million Covid relief package. Collectively, welcome relief on both the medical and financial fronts, as we continue to carefully navigate the impact of the pandemic.

For the banking community, aside from the additional aforementioned PPP support, some recent news and developments appear to elicit cautious optimism with regard to the economic outlook:

  • The Fed will continue its accommodative policy, involving an active bond-buying program (approximately $120 billion per month) that will serve to suppress long-term yields for the foreseeable future (highlighting that old Wall Street adage, “You can’t fight the Fed”), as expectations are now for rates to remain near zero into 2023. While undoubtedly “margin-challenging” for banks, it is providing much-needed oxygen (and time) for struggling businesses and consumers.
  • Recently concluded stress tests at the nation’s largest banks, gauging the potential impact of the pandemic under different recovery scenarios and timelines, largely reflect adequate capital and reserves that, again, would appear to underscore the relative strength and resiliency of the financial sector entering this downturn.
  • Those severely adverse scenarios driving the stress test results, which resulted in significantly elevated (albeit hypothetical) losses, have nonetheless led to the Fed alleviating dividend and stock buyback restrictions beginning in Q1-2021. Again, this would seem to reinforce the Fed’s overall relative confidence in the U.S. banking system.
  • As we have talked about in recent months, the aggressive and massive loan loss reserve-building across the banking sector earlier in the year, as uncertainty dominated the landscape,  witnessed notable moderation in Q3 (a few large banks even posted negative provisions).
  • Europe, which had imposed strict restrictions at its banks that effectively eliminated dividends and halted buyback programs, has announced a select easing of those mandates.
  • Unemployment rates continue to grudgingly decline across both the state and the country, with levels now hovering just below 7%.  For sobering context, Michigan’s unemployment rate measured 24% in April.
  • While bank stock valuations have picked-up noticeably in recent weeks, most institutions still hover at-or-around tangible book value. Additional clarity on the economic horizon would appear to be mitigating downside risk, but even with all the positive “noise” around PPP efforts and robust mortgage markets contributing to operating revenues and helping somewhat offset both margin pressures and reserve building, the magnitude of future credit losses still remains an open item. The positive: that picture does not look as dire as it did just a few months ago.
  • And last week, the $120 billion Huntington announced plans to purchase the $48 billion Detroit-based TCF in an all-stock transaction valued at roughly $6 billion, or approximately 1.5x tangible book value. While corporate headquarters will continue to reside in Columbus, Ohio, we view the simple occurrence of such a large-scale M&A deal as more than a subliminal signal that a major Midwest regional bank is clearly optimistic about the future of the Michigan economy. And, presumably, the belief that a national recovery is now firmly in process.
Back in April, we talked about the Fed slashing interest rates close to zero and overseeing a new quantitative easing program. Those monetary policies remain intact and are now further guided by an approach to any inflationary pressure that is designed to provide the Fed with added flexibility on potential moves in the future. Efforts to support the economy, albeit in an environment that portends low rates for quite some time, continues to be warmly received, particularly by the equity markets.

The wild card remains the course of the virus. Difficult times on the healthcare front are assuredly ahead of us. The timing and magnitude of the economic recovery will largely depend upon the potential for new or additional lockdowns if medical facilities and resources are overwhelmed while vaccines are being distributed. Over this period, the economy needs to, at the very least, remain “functioning” and businesses need access to funding to continue to survive the storm and safely re-open in the future. It appears obvious that no policy or set of policies can fully assist in the recovery until the public health issue is resolved in a manner that enables us to engage and conduct commerce while balancing the healthcare and business risks. In doing so, we ideally help the U.S. economy to avoid an extended downturn. As we said in April, business lockdowns and stay-at-home orders are not a function of consumers unwilling to spend. But, they effectively cement that they are largely unable to spend.

In closing, attached please find a mid-December 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 prayers and best wishes to you and your loved ones for a wonderful Holiday Season! I look forward to re-connecting with all of you as 2021 unfolds. And again, this simple but heartfelt counsel: Be careful. Be smart. Stay healthy. Take care of your family, your colleagues, your community. Most important, be sure to take care of yourself. God bless.