Janney’s Financial Institutions Group (FIG) hosted nearly 100 public and private banks nationwide at the 25th West Coast Bank CEO Forum on January 29–30 in Phoenix, Arizona.
The event featured panel discussions and elevated conversation on trends, landscape, issues, and opportunities within the community bank space. Overall, 2020 is on-track to be a positive year; however, the path to success has some challenges.
These are the top trends we observed:
- 1. Many banks cited maintaining sustainable growth and improving operating efficiency as core strategies for the upcoming year.
- 2. Community banks enjoy a competitive advantage with small- and medium-sized businesses. This critical point drives long-term investment interest in this sector.
- 3. Dividend yields are solid and perceived as frequently rising thanks to strong capital at nearly all institutions. Over time, banks may even approach the levels paid by utilities.
- 4. As a result of reduced interest rates, banks have more capacity to lower deposit costs this year. Coupled with ongoing growth and expense initiatives, this has the opportunity to boost banks’ return on assets (ROA) and improve net interest
- 5. Interest in mergers and acquisitions (M&A) remains high, but, depending on the size of the institution, the challenge is finding buyers. Knowing your target is extremely important, and many banks are starting to show a preference toward smaller
- 6. Mergers-of-equals (MOEs), the combination of two like-sized organizations, are easy to consider, but hard to complete.
- 7. Credit unions have entered the M&A game and are proving to be difficult competitors. However, these transactions are often challenging in terms of culture, systems, and compensation.
- 8. The Current Expected Credit Losses (CECL) accounting standard is at the forefront of everyone’s mind. The standard focuses on expected losses over the life of loans as opposed to incurred losses, and causes investors to question banks’
earnings quality. The regulation adds volatility to earnings, but should not change the approach to lending.
- 9. Digital will play a key role in the year to come in terms of implementation and impact. While technology creates efficiency and relationships that are key to competing with bigger regional banks, data ownership is more challenging with large core
system providers. Investments in technology will be necessary to win deposits of younger, more tech-savvy clients.
- 10. A diverse portfolio will likely be key to successfully navigating a future downturn. Commercial and industrial (C&I) loans are a significant risk factor to watch for banks because they present the opportunity for higher losses.
While new competition, advancements in technology, and regulatory changes present challenges to the industry as a whole, experts share many bright spots to look for in 2020.
This publication is a product of Janney Montgomery Scott, LLC’s Capital Markets Group and is neither an offer to sell nor a solicitation to buy any security. Additionally, this should not be considered research or a recommendation.