Banking outlook: Economic signs grow increasingly optimistic

By The Lane Report

Kentucky bankers and wealth managers see improving economic conditions and better financial metrics pointing toward continued recovery in 2013, both in their industry and the broader U.S. economy. The first glimmers of light in several years in real estate and housing are creating optimism.

Here, we offer their predictions for the coming year.

Banking
Several Kentucky banks are shown in downtown Louisville.

RELATED: Kentucky banks — Is it time to consolidate?

“Despite uncertainty about potential significant government spending reductions, the economy is likely to continue to recover in 2013, and perhaps at a faster pace than it has. Optimism is reflected in the equity markets. The broad Wilshire 5000 index of all publicly traded companies is in record high territory.
The real estate excesses that plagued many communities are clearing, and the housing industry is recovering. Houses are as affordable as ever, and prices are rising. Mortgage rates are extremely low. Recent college grads, an important driver of housing demand, are beginning to find jobs. Almost two-thirds of recession job losses have been replaced or recovered. Households enjoy historically low debt-service payments. The banking system is extremely well capitalized. Businesses are more profitable than at any time since such statistics have been collected. Fears of a breakup in Europe have passed. Investors are moving funds out of cash into credit-starved pockets of the credit market. Negligible construction the past half decade has driven vacancy rates down for most categories and pushed rents up. And the Federal Reserve intends to keep its policy rates low until the economy is within sight of full employment and inflation climbs back up to its long-run goal.”

— Paul Costel, President of Commercial Bank, Chase

 

“Open-market interest rates will remain relatively flat for the year. Housing should improve because inventory is shrinking and there is pent-up demand. Unemployment will decline slightly due to increasing demand for goods and services. Banking consumers will have even more attractive rates than previously seen; banks are flush with money to lend but little demand. Additionally, large regional banks that have been stingy with loan money the past few years will get back into the game. That will cause rates to decline at both larger banks and community banks. Banks also will be committing longer terms with fixed rates to buy business from other banks’ customers. This in turn will drive deposit rates lower than what they are today.”

— M. Lynn Cooper, President/CEO, First Security Bank

 

“According to economists, the recession ended 14 quarters ago, but it probably doesn’t feel like it to all of us. Whatever recovery we’ve been under continues to be slow and methodical. An improved housing market, modest gains in employment and continued low interest rates should contribute to creating a positive environment for both consumers and businesses. U.S. Bank has remained among the strongest in the industry, as indicated by our continued “best of class” debt ratings and customer service ratings. We have continued to invest in building the bank to be great in great times.”

— William “Bill” J. Jones, Division Manager, Community Banking, Southeast, US Bank

 

“We look optimistically at 2013’s business prospects. Loan requests are up, and we are funding loans to businesses and individuals who are purchasing or expanding their operations in Central Kentucky. This loan demand indicates to our team that the economy is improving. Traditional Bank continues its mission of providing the best in customer service and relationship banking, and is gaining us referrals from our customers and friends. We continued to lend prudently during the recession of 2008 and have maintained excellent earnings and strong capital levels. We feel 2013 will be a year of opportunity and look forward to continuing to serve our customers.”

— William “Bill” Alverson, President, Traditional Bank

 

“Kentucky’s economy is growing slowly, but 2013 is going to be a challenge. We need to create new high-value job opportunities, and the legislature must initiate tax reform that can create revenue to fund pension reform and increase education support. We can’t create better jobs to lift consumer spending without more emphasis on a well-trained job-ready workforce. Recovery from the recession has been slightly better than the nation as a whole. Consumer spending is recovering and the housing industry is rebounding. Interest rates should continue at current levels at least through 2014, fueling home sales growth. The slow-growth economy has challenged community banks to adopt new standards and strategies to assist their markets. They are working closely with customers to build upon the available opportunities that will lead to better growth and prosperity for our communities.”

— Luther Deaton, President, Central Bank

 

“Citizens Union Bank is cautiously optimistic 2013 economic conditions will continue in a positive direction, with good growth potential and earnings improvement across the industry. We have an increase in commercial loan requests, purchase activity in one- to four-family residences and notable increases in escrow activity with our attorney clientele. However, risks include the unknown impact of sequestration, the impact on small businesses of new healthcare regulations and continued high unemployment levels. An example of the mixed economic situation is that several customers are experiencing significant sales and production increases, but have no intention of adding employees for the foreseeable future. Thus, while GDP and economic activity improves, employment levels may stay stagnant.”

— Christopher Dew, Senior Vice President, Citizens Union Bank

 

“The S&P 500 Financial sector had a 28.8 percent return in 2012, versus 16 percent for the entire S&P 500. Banks benefited from bringing down their loan-loss-reserve balances and adding the amounts to income; improved profits allowed many in the sector to aggressively increase dividends. We suspect 2013 will have several headwinds and tailwinds: Top line growth will be a headwind for banking and insurance. Lower amounts of loan-loss-reserve adjustments to bring to the income statement will be a headwind for the banks, but recovering real estate prices could be a huge tailwind for banks and REITs. The better economic tone could be a tailwind for the diversified financials. In summary, we view 2013 as a year of overcoming skepticism of repeating the group’s success from 2012. Markets may take a wait-and-see attitude until revenue and earnings growth trends are better known; investors should remember 2013 will likely see the sector continue aggressively increasing dividends and share buyback programs. Bloomberg’s consensus of analysts’ estimates projects financial sector revenues will grow 2.6 percent in 2013 (versus 0.4 percent in 2012), while earnings per share will increase by only 9.7 percent (versus 18.8 percent in 2012). The wildcard for 2013 could be consolidation. There was not much merger and acquisition activity during 2012, so we may see an increase in 2013, which would also be supportive for share prices.”

— Tom Partridge, President/CEO, Fifth Third Bank (Kentucky)

 

“The banking industry should experience slow growth in 2013 because of over regulation in the form of Dodd/Frank legislation. High compliance costs and tighter lending requirements strangle revenue opportunities. Since it is toughest on small community banks, we will start seeing some mergers and acquisitions in an attempt for synergy through reducing per-customer compliance cost. Most of our industry is now facing revenue stress while scouring the countryside for good loans and investments. The Fed’s QE-infinity program is forcing investors to the stock market, leaving banks to struggle with investment return. New taxes implemented this year and next for healthcare, etc., will further slow an already slow economy. Until we make the structural changes needed to entitlement programs, our economy will ‘slug’ along.”

— Ballard Cassady, President/CEO, Kentucky Bankers Association

 

“We see improvement in economic conditions in most of the communities we serve in Kentucky, West Virginia and Tennessee; however, some businesses, particularly coal and natural gas, are negatively impacted by lack of demand, low prices and the current regulatory environment. Improvement in the economy, as with the downturn, varies within the communities we serve. Kentucky’s economy has weathered weak conditions better than many states, but the pace of improvement is slow, similar to the nation. Community Trust continues to meet the challenges of operating within weak economic conditions and achieved record earnings performance for 2012. The diversity of the economic base of the geographic areas we serve allowed us to continue our history of profitability. We exceed peer institutions in earnings while providing a strong dividend to shareholders. Our financial strength poises us to seize opportunities as the economy continues its recovery.”

— Jean Hale, Chairman, President/CEO, Community Trust Bancorp

 

“Our economy is progressing despite numerous headwinds. Unemployment has stabilized. Manufacturers are reporting issues with hiring and retaining skilled labor. Corporations have trimmed costs to mitigate slower revenue growth. As a result, they continue to build liquidity. Since many companies have no more cost reduction levers to pull, look for more mergers and acquisitions. Housing has stabilized and begun to recover. Homeowners continue to refinance at lower mortgage rates, providing fuel for retail spending. While we do not expect the economy to return to the pre-recession growth rate in 2013, our outlook is very positive.”

— Hoyt Almond, Regional President, BB&T

 

“Our view is that 2013 will be a year of decision and implementation. Government at all levels has to deal with budget constraints, with most people focused on the national headlines. More to the point, businesses have to begin to consider how to move forward. Do they continue to focus on the evident problems or look beyond them to the developing opportunities? This is especially true, too, for individual investors as they are beginning to realize the costs of defensive strategies while we anticipate economic momentum and the market moving ahead.”

— John L. Gardner, Senior Vice President Complex Manager, Wells Fargo Advisors LLC

 

“Merrill Lynch’s view of the economy is that growth will remain stubbornly slow yet relatively steady. This will lead to an equity market that continues to grind higher in the face of much worry. Our economists see evidence of a gradual improvement each day with a pickup in construction, a slow decrease in unemployment and an increase in wealth as both real estate and stocks perform better. A positive outlook is not without risks, and we would use pullbacks as an opportunity to add to risk assets to take advantage of the “great rotation” of investments from safe assets (bonds) to risk assets (stocks). This rotation should gain momentum in 2013.”

— Travis Musgrave, Senior Vice President Wealth Management, Merrill Lynch Wealth Management

 

 

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