Solid Outlook: Banking
Every day brings a new report about the economy, but sometimes a fresh analysis seems to contradict the last story. So how’s the economy really doing? Ask your local banker. By that measure the economic footing has stabilized for small and mid-sized businesses. Bankers, from community banks to the big Fortune 500 players, are seeing more companies looking for loans for equipment, commercial real estate and expansions. In a clear signal that many business owners are feeling more confident, bankers are seeing customers tap their lines of credit for working capital.
It’s been a long, slow climb out of the recession, which remains a yardstick to gauge economic progress. But to most, conditions for 2015 look brighter.
Using the recession as a reference point, in “2014 for small business, things started to recover pretty well,” says Craig Veurink, Twin Cities business banking regional manager for U.S. Bank. “They started to purchase more equipment, expand their commercial real estate properties. All those signs would say the small business economy is pretty much back intact: 2014 has set the stage for a robust 2015 in the small business segment.”
Veurink works with small businesses that have revenue in the range of $5 million to $20 million. Noting economies of scale, Veurink adds, “The smaller the company, the longer it’s taken to recover.”
Top Retail Banking Trends for 2015
Jim Marous, publisher of Retail Banking Strategies for The Financial Brand online publication identified key trends for 2015 after consulting with 60 experts around the globe. He also is the publisher of the Digital Banking Report. Here are some of the major trends and predictions offered by Marous on thefinancialbrand.com.
Using Customer Analytics to Drive Contextual Experiences
As a growing number of consumers use mobile devices and online banking, their expectations for communicating with banks are changing. “In 2015, banks and credit unions will leverage richer analytics-driven insights to enable a more personalized approach to targeting and engaging with consumers,” Marous writes.
“The banking industry is still well short on harnessing the power of mobile beyond just a channel or technology,” Marous says. However, he adds, financial experts tell him that 2015 “will be the year when leading banks will use mobile design strategies as the foundation for all customer touchpoints.”
Increasing Digital and Social Selling
“Forrester Research has found that many banks continue to have too little in the way of marketing, merchandising and product research tools available to prospects on tablets and smartphones—and too little mobile cross-selling to current customers,” Marous reports. “They predict twice as many customers will research financial products on their smartphones and tablets in 2015 compared to 2014.”
Mass Market Acceptance of Mobile Payments
“With new services like Apple Pay, mobile payments are likely to become increasingly commonplace in 2015,” Marous writes. “According to Capgemini’s 2014 World Payments Report, m-payments are projected to grow at 60.8 percent in 2015. However, until mobile channels are fully integrated with back-end support systems, banks will continue to struggle to drive value from mobile.”
Focus on Security and Authentication
“Mobile identity authentication has become more important for financial institutions as consumers migrate away from online banking to smartphones and tablets,” says Marous. “Consumers’ changing preferences, combined with emerging technology, has forced financial institutions to take a closer look at how they identify and authenticate mobile banking users when they log into their account.”
Investments in Innovation
“As the industry continues to be impacted by agile start-ups and niche players, banking organizations are beginning to think more like disruptors, obsessing about consumer experience and using digital technology to avoid being outflanked by new entrants or established competitors,” Marous writes.
Tapping working capital
But today Veurink is encouraged by what he sees as a trend of more businesses tapping into their lines of credit. “They’re starting to access their working capital,” he says. “That’s a sign that the economy is making headway.”
Minnesota mirrors national trends as the gradual, incremental gains since the recession are finally starting to feel more stable for many small businesses. Across the board, commercial and industrial (C&I) lending is up.
“There’s been a decent increase, and we think that will likely continue,” says Brian Stephens, national leader of the banking and capital markets practice for New York-based KPMG, an audit, tax and advisory firm. Regarding C&I lending demand, he says, “I don’t see any reason why it shouldn’t continue to grow. I think that’s one area where the banks can look for some realistic growth.”
Phil Trier, who leads commercial banking for U.S. Bank as its Twin Cities market president, works with middle-market companies with annual revenue of $20 million to $500 million.
“Our loan volume is up year-over-year more than 20 percent,” says Trier, comparing 2014 to 2013. “The middle market seems to have recovered faster than the small business segment. Many of our customers are family businesses, they’re privately held. We’ve seen customers feel better about the outlook in the economy.”
Trier agrees with other observers that many business owners have turned the tough lessons and survival skills of the recession into ongoing business strategies.
“The recession really forced a lot of companies to become very lean. They had to do more with less. They had to adopt just-in-time inventory strategies,” says Trier. But now, he notes, “we are starting to see an increase in [credit line] utilization.”
Chaska-based Klein Bank, a community bank with 21 branch locations, also has seen the rising optimism of its customers. Klein Bank is feeling bullish itself: The bank acquired the smaller Prior Lake State Bank in 2014.
“I think the overall economy has improved,” says Dave Rymanowski, chief business banking officer for Klein Bank. “The majority of businesses that we’re talking to are healthy.
“We’re pretty positive going into 2015. We’re a community bank, so we’re a reflection of our local community. 2014 from my perspective has been a continued year of recovery,” Rymanowski says.
He observes that business owners today are more willing to pursue loans for expansion, projects and equipment. But the recession imposed discipline on companies, who are still focusing on operating efficiently and cultivating business niches where they can be successful.
“We’re seeing just overall confidence improving,” says Rymanowski. “What a recession will do is force everyone to be smarter about how they’re running their business, how they’re making decisions.”
When facing a tough economy, he says, “There’s nothing easy. Going through a historic downturn, it’s humbling.”
Business owners with a solid credit rating and good cash flow often can choose among banks competing to land their business.
“It’s very competitive. The banking industry has also recovered, and there’s a lot of liquidity in the marketplace today, so for a well-qualified borrower there are lots of options,” Rymanowski acknowledges.
One of the great unknowns of the banking business is where interest rates, which remain near historic lows, are headed. The conventional wisdom holds that rates can’t stay low forever and at some point will start to increase. But bankers have been saying the same thing for several years, and rates haven’t really moved. Interest rates for small business loans remain in the range of 4 to 6 percent.
Customers have the same sense and are looking to lock in low rates with long-term fixed-rate deals. While no one is expecting interest rates to suddenly skyrocket, many bankers think that rates could start to climb a little in the second half of 2015.
There are still historically low finance rates, notes Rymanowski. “As we’re going into 2015, we’re actually looking for some uptick in overall interest rates.”
Julie Causey, chairman of St. Paul-based Western Bank, echoes others in the industry who are seeing a renewed appetite for business lending.
“For Western Bank what we are seeing is an enormous opportunity to help small and mid-sized business customers, by being a bank that is both 100 years old but also has $20 million loan capacity,” says Causey. “We are banking bigger deals.”
In 2012, Western Bank became a wholly owned subsidiary of Omaha, Neb.-based American National Corp. But Western Bank remains a separately chartered independent bank under a two-bank holding company, which is controlled by two families. Causey says that the added muscle means that Western Bank now has the capacity to serve existing customers as their businesses grow.
“We’re seeing some expansion among manufacturing and distribution companies. I think we’re seeing commercial real estate activity pick up,” says Causey. “There’s obviously a lot of work in health care right now.”
Banks looking to grow
Consolidation has been a recent trend in the banking industry, and Causey expects to see it continue.
“We will probably buy another bank or two,” says Causey. “We are looking for asset pools to purchase. Our idea is that we will grow this bank to the size of our Omaha bank, which is a $2 billion bank.”
Today, Causey says that Western Bank has assets of about $550 million.
“[Our] loan volume in ’14 was certainly stronger than in ’13, and I would say [there were] more sizable deals for us,” says David Reiling, CEO of St. Paul-based Sunrise Banks. “Our pipeline is at a high from the past two years. That, for us, speaks to the demand that’s out there and the likelihood for potential projects.”
Reiling cautions that the rise in loan business does not translate into an economic boom. He says that uncertainty is still a factor for business owners, but it’s not as bad as it was during the depths of the downturn. “For our clients that work in the housing sector, it’s OK but not robust,” Reiling says.
But like other bankers, Reiling is seeing customers increasingly tapping their lines of credit, which he reads as a signal of improving confidence and business fundamentals. “That means that things are starting to move a bit faster,” he notes.
Looking at the macroeconomic picture, Reiling is encouraged by the state budget surplus and lower gasoline prices, factors that could help further raise optimism. “The reduction in gas prices is just an immediate boost to the pocketbooks of everybody,” Reiling says. He also is seeing strong interest in the core cities, a focus area for Sunrise Banks.
“We have kind of a biased view, but we are seeing activity and interest in the urban core. The urban core is not a bad place to be at the moment,” Reiling says. “People are interested in being in the center city.”
Causey notes that Western Bank’s community roots remain important to its customers.
“We are headquartered right here in Frogtown [in St. Paul] on the light-rail line,” says Causey. “We are all day, every day involved in the development of the metro area because we’re smack-dab in the middle of it.”
If happy days are not quite here again, more optimistic times have returned.
“From my perspective, from the customer’s view there is less uncertainty in the market,” says Trier of U.S. Bank. “They have more certainty about what’s around the corner. That gives them more confidence to make long-term decisions.”
Burl Gilyard is the senior writer for Twin Cities Business.