As Q1-2021 earnings releases hit the wires, the big banks have already set a general tone along the lines of “it didn’t get as bad across the board as we initially thought a year ago…but we are still not completely out of the woods”, economic forecasts continue to reflect a brighter, and welcoming, picture for the nation. Most investors and industry analysts looked past traditional metrics in 2020 and instead focused on underlying fundamentals related to capital resiliency, emerging asset quality trendlines and deferral/forbearance activity, operating cost controls, the technology supporting distribution channels, and risk management efforts undertaken during these unprecedented times. For so long it has felt like we were mired in ongoing shutdowns, with each day bringing heartbreaking news on case counts, hospitalizations, and fatalities. As multiple large pharmaceutical complexes across the globe raced toward effective vaccine development and medical solutions with high degrees of efficacy, while continuing to process the mounting data on Covid’s impact and its emerging variants, today a combination of rapid vaccine distribution and ongoing social distancing best practices appears to be shining some much-needed light into windows that have been metaphorically darkened for much too long.
This pandemic-disjointed market has caused distortions of all shapes and sizes across the industry. Pre-pandemic, access to secure, reasonably priced deposit funding had already emerged as a primary industry challenge for bank’s looking out on a technology-altered horizon. Today, stimulus-fueled programs at both the consumer and business levels have just about every institution awash in deposits and searching for economically viable (and safe) outlets. This massive funding “windfall” has only exacerbated margin pressures that were already painfully existent before Covid. PPP loan activity aside, core growth in portfolios remains fairly tepid, with few exceptions, and for the moment discounting the explosion in the mortgage markets around this ongoing low-rate environment. As it relates to low interest rates, the Fed continues to signal that no change in its accommodative policies is currently (and foreseeably) on the docket. To the contrary, recent statements from Chairman Powell underscore that any increase in rates will likely be proceeded by an extended period witnessing the Fed pulling back on its open market purchases. So, I guess, we will all get an “early warning” that rates may be on the brink of moving higher “well before” they actually do. Or maybe not. Pre-pandemic, we all experienced Fed proclamations with regard to policy that either never did materialize or shifted dramatically as events unfolded that they believed rationalized their sudden course corrections. Covid appears to have created enough underlying economic uncertainty to ultimately justify Powell’s long-held stance “to do whatever it takes” for the Fed to adhere to its mandates on full employment and inflation. Things change and market dynamics can sometimes pivot quickly, dramatically, and violently. Witness this past year.So as banks across Michigan continue to report Q1 results, I recommend a bit of tempered patience in digesting what the numbers may actually be saying. Yes, the general economy is clearly on much better footing than anticipated a year or so ago, but that does not necessarily hold true for many in the leisure and hospitality sectors that continue to struggle. Portfolio diversification and concentrations will be telling for some. At the end of the day, “headline optics” that might reflect a blow-out Quarter fueled largely by reserve releases, will eventually give way to a hard, cold analytical assessment of the core, sustainable cash flows and underlying fundamentals of the operation. Be candid and transparent…it is always the optimal long-term path. Simply releasing excess reserves is not a core fundamental metric that Wall Street will hang its hopes on when investing long-term in traditional commercial/community banks.
It seems inevitable that supply chain disruptions, measured capital investments amidst the uncertainty, and labor shortage pockets in certain sectors, will only add to seemingly increasing inflationary pressures. Remain focused on critical credit quality metrics and underwriting discipline. Pent-up demand and massive stimulus injections may be poised to unleash a veritable tsunami of economic activity that will effectively lift all boats. But as Warren Buffet is fond of saying, and I paraphrase here, you only find out who has been swimming naked when the tide goes back out.
While most balance sheets have temporarily (presumably) ballooned with stimulus-related funds, the wisdom of retaining solid capital levels has not abated. We will all know soon enough just how “sticky” some of those new deposits are and which PPP loans and possible new relationships are potentially long-term business versus a temporary stopgap to get through the crisis. Better to ensure you have the resources to support a healthy foundation, and conceivably can explore alternatives to prudently redeploy if any excess arises, then to incur any unnecessary regulatory wrath for the perception of maybe getting stretched a bit thin.
I am ecstatic seeing the Michigan Bankers Association sending emails about the resumption of “Group” outings across the state in the coming months, and both the MBA and Community Bankers of Michigan gearing-up for their annual conventions. Every step forward toward a return to something approaching normal is a welcome development after this past year. M&A activity is picking back up, reflecting both confidence and comfort in loan portfolios and economic expectations. Maybe it’s because it is Spring, after another cold Michigan winter. Maybe it’s the successful conclusion of the recent NCAA basketball tournament and the traditional opening weeks of Major League Baseball, after one was shut down and the other operated in a condensed, spectator-less bubble, respectively, last year. Again, simple but optimistic steps toward some sense of normalcy, whatever that might now be in this new world order. Any and all efforts in that vein are longingly and enthusiastically welcome, and hopefully more than a brief respite.
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. I look forward to re-connecting with all of you as 2021 unfolds. 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!