In December of the year 1620, the famous ship the Mayflower and its 102 passengers arrived on the cold shores of Plymouth, Massachusetts. During this first winter, passengers remained on board the Mayflower and suffered through outbreaks of scurvy, pneumonia and tuberculosis. By the time winter was over, only 53 of the original passengers had survived. It’s hard to imagine that, after all this hardship, the Mayflower survivors found it fitting in late autumn 1621 to give thanks for their harvest in what is known today as “Thanksgiving.”
Seeing the blessings amid toil and suffering may be just the attitude bankers need in 2010. There have been days when industry conditions felt like scurvy (low earnings), pneumonia (bad loans) and tuberculosis (excess regulation). The bankers left standing today are a tired and huddled mass if ever there was one. Yet, like the Pilgrims on the shore of Plymouth 389 years ago, maybe this week would be a good time for bankers to adjust their optics.
As we stay home this Thursday to watch our familiar football dynasties the Lions (2-8) and the Cowboys (3-7) and place a moratorium on low-carb diets nationwide, maybe … just maybe … bankers should take the time to give thanks for what we do have.
I’m no Pollyanna, but I am a stickler for seeing the glass half full. So GonzoBankers, as you pass the gravy and give thanks for more important things in life, you may want to think about what bankers should be giving thanks for:
We should give thanks that the loan losses are not getting worse – since the banking crisis began in the summer of 2008, non-current loans have jump from 2% to over 5% – an ugly few years. However, June FDIC data showed an ever-so-slight drop in non-performers from Q1 2010, and it is very likely another drop will occur when Q3 figures are released. It is darkest before the dawn, and it seems now that exhaustive portfolio reviews have revealed nearly all the problem credits and most have been accounted for in reserves. The vast majority of recent Q3 earnings calls reveal bankers expecting progressively improving credit quality conditions.
We should give thanks for the presence of earnings – with all the bad press, one may think the banking industry is unprofitable, but in fact banks earned $21.6 billion during the second quarter of 2010. This $85 billion in annualized profits is far from record levels, but it’s still a solid .61% ROA in the middle of deflationary doldrums. As credit losses begin to subside in the years ahead, bank core earnings should be decent.
We should give thanks for strong capital levels – despite the shock of the Great Recession, the banking industry has taken bold action to increase capital levels and has been able to bring freshly raised equity to the game. Since the crisis started, the industry has gone from a Tier 1 risk-based-capital ratio of just below 10% to 12.44% in June 2010. The leverage ratio now stands at a solid 8.77%. When a recovery occurs, most banks will have capital standing ready to put to work.
We should give thanks for the benefits of political gridlock – the recent elections may have not turned out optimally to one banker or another’s personal political preferences, but they will represent a first step in economic recovery. Because uncertainty has been keeping cautious consumers and businesses on the sidelines, a lack of anything big and impactful coming out of Washington in the next two years may be just the anecdote to allow for new investment and spending in the economy. In addition, the “constitutional principles” and “too much government” themes spurred by the Tea Party may provide some support for having sensible discussions about where new financial regulations are fair and where they are just plain overreaching.
We should give thanks for speedy problem bank resolution – however one feels about the political aspirations of FDIC Director Sheila Bair, it would be hard for anyone to deny that the performance of this regulator has been rock solid in addressing problem banks. No sugar coating. No forbearance. The agency has delivered a consistent string of announcements every Friday that undercapitalized banks have been shut down and quickly sold to the highest bidders. For surviving banks, this clearing of the market speeds up industry rationalization. It will avoid “zombie” banks perverting market competition and rates, and it will provide some help in reducing industry overcapacity.
We should give thanks for inertia in payments and delivery systems – with all the aggressive innovations and non-bank investments going into payments and alternative delivery, it is remarkable how much of the payments revenue stream our industry still holds. We haven’t been “i tuned” like the music industry or “amazon’d” like local book stores. Bankers must see this Thanksgiving blessing as short-lived and acknowledge that inertia cannot protect them for long as mobile and Internet payments mature. We still have the consumers’ trust in payments, and most customers still want to bank with banks. However, taking this situation for granted is asking for a real strategic crisis down the road.
We should give thanks that consumers have gone cold turkey with their debt addiction – for the first time in more than 50 years, this recent banking crisis has brought a decline in consumer debt. While this may have slowed our economy and suppressed bank loans in the short term, it has done something important for our economy in the long term. It has reintroduced the idea of responsible personal finance. Although Wall Street may thrive on poor consumer behavior because it can package and purge the risk long before the music stops, banks want to deal with consumers and businesses who deal in reality. Real bankers want credit to play a constructive role in the economy, and they want to dole it out carefully so it gets paid. Trying to compete with Wall Street on casino credit terms was insane. Let’s give thanks that the casino has been shut down.
We should give thanks that dire predictions don’t kill us – this Thanksgiving, bankers should think back on all the times they have been declared dead by the pundits and public and realize that they participate in an oddly resilient industry. We may think it’s hell out there, but a day in the telecom industry or a day in the oil rig industry or a day in healthcare wouldn’t be fun and games either. Somehow, year in and out, bankers persevere. In 1993, Time magazine ran an article titled “Are Banks Obsolete?” that pondered: “Who really needs banks these days? Hardly anyone, it turns out.” A year later, Bill Gates remarked, “Banks are dinosaurs, we can bypass them.” There have been ups and downs, trials and tribulations since that time, but let’s take a quick comparison from 1993 to see how well these predictions turned out.
| 12/31/1993 | 6/30/2010 | |
|---|---|---|
| Pundit Talk | Time magazine calls banks "obsolete." Bill Gates calls banks “dinosaurs.” (’94) | Time Warner struggles, with stock down 75% in the past 10 years. Microsoft struggles, with stock down almost 30% in past 10 years. |
| Total Banking Assets | $4.7 trillion | $13.2 trillion |
| Total Banking Deposits | $3.5 trillion | $9.1 trillion |
| Total Banking Revenue | $252 billion | $678 billion |
| Bank Efficiency Ratio | 64% | 55% |
| Bank Leverage Ratio | 7.60% | 8.80% |
Well, contrary to prediction, we’re not dead yet. We grew slowly but steadily. We made some huge mistakes along the way, but we improved efficiency and we built capital. And that, my friends, does not fit the Webster’s definition of “obsolete.” The opportunity to remain relevant rests in our hands.
As we sit down with family this week, we may be more worried about sick relatives and kids serving overseas than we will be about things back at the bank. However, if the bank does cross your mind, remember that all is not lost, and 2011 will be a year of moving forward past the sting of a historic crisis with a great deal more wisdom to guide us into the future.
Enjoy the meal … whoever’s cooking!
“Thanksgiving is an emotional holiday. People travel thousands of miles to be with people they only see once a year. And then discover once a year is way too often.”
–Johnny Carson