9 things bankers fear this Halloween season

ByKristin Broughton, Neil Haggerty, Andy Peters

October 28, 2018 9:00 PM

By most accounts, the banking industry is in great shape. The economy is humming, last year's tax break provided a boost to profits, and President Trump's picks for regulators are now in place and aiming to ease back rules.

But scratch beneath the surface and it won't be difficult to find fears for the future. That starts with the possibility of Democrats seizing one or both chambers of Congress, but includes concerns about consumer and C&I lending and lingering fears of what Amazon is up to when it comes to the banking business. There's clearly more than one bogeyman haunting the industry.

Following is a list of what is spooking bankers this Halloween:

Survey of bankers concerned about Democratic control of House in 2018 midterm elections

Democrats capture one or both chambers of Congress

Arguably the biggest worry among bankers at present is that Democrats will seize control of the House and possibly even the Senate in the upcoming elections.

Current polls indicate the GOP is likely to keep the Senate, but the House is trending toward Democrats. If Democrats take either or both, it could imperil any chance for further regulatory relief and cause Trump administration regulators to face extra scrutiny on Capitol Hill.

Democrats say bankers shouldn't be concerned, but that message has not resonated among most in the banking industry.

When asked how big of a concern Democrats taking control of the House would be on a 1-5 scale (with 1 indicating the least concern and 5 the most), 41% of more than 400 bank chief executives, presidents and chief financial officers responded with a 5 rating, according to a recent survey conducted by Promontory Interfinancial Network this month. An additional 32% rated it a 4, meaning that a combined 73% of respondents were seriously worried about the prospect.

While further banking legislation — either to strengthen or weaken regulations — likely wouldn’t come to fruition with a Republican president and a Democrat-controlled House, the shift in congressional power could delay President Trump’s deregulatory agenda.

Rep. Maxine Waters, D-Calif., an outspoken critic of Wall Street and President Trump, would likely take over as chair of the House Financial Services Committee. That could result in increased oversight of the biggest banks and Trump-appointed regulators, including Federal Reserve Vice Chairman for Supervision Randal Quarles and Comptroller of the Currency Joseph Otting.

“High-ranking Fed staffers who might otherwise be working on a deregulatory rulemaking can get sidetracked responding to Waters or prepping their boss for a congressional hearing,” Ian Katz, an analyst at Capital Alpha Partners, said in a note Friday. “Waters will also grab headlines by calling hearings on Wells Fargo, Equifax and Deutsche Bank’s financial ties to President Trump. And she can talk about impeaching Trump. But the House alone won’t be able to follow through on those headlines.”

Big problems surface in consumer credit

According to most major indicators, the economy appears to be humming along, as unemployment has hit a nearly 50-year low and spending among consumers and government agencies remains strong.

But credit problems may be lurking beneath the surface.

After paying down debt after the financial crisis, consumers have since leveraged up, pushing household debt to an all-time high. Over the past decade, student loans have more than doubled to just over $1.4 trillion, according to the most recent report on household debt from the Federal Reserve Bank of New York. Credit card debt, meanwhile, has increased 8% in the last year alone, the report said.

Over the past two weeks, bank executives have reassured investors that, while credit card charge-offs are edging upward, they are still manageable and low overall. At JPMorgan Chase, for instance, the net charge-off rate on its card portfolio was 2.91% as of Sep. 30, or 4 basis points higher than a year earlier.

“That’s something we’ve been tracking and guiding to and expecting,” said Chief Financial Officer Marianne Lake during JPMorgan’s Oct. 12 earnings call.

Other areas of consumer lending are showing more urgent reasons to worry. Discover Financial Services said Thursday that it expects charge-offs in its portfolio of personal loans — a business in which it has recently scaled back — to rise by 60 basis points in the fourth quarter, and hover around 5% during 2019.

Unsecured personal loans, of course, have been a popular product for customers looking to refinance high-cost credit cards, and several big banks — HSBC, Citizens Financial and BBVA Compass, to name a few — have recently gotten into the market.

The challenge with those loans, however, is that after customers use them to clear off their credit cards, they start spending heavily on those cards once again. Their credit scores suffer as a result, drifting downward.

“It’s very tricky to underwrite, because you get one decision,” Discover CEO Roger Hochschild said in an interview with American Banker. “It’s not like a card, where you have ongoing data and you monitor it. You decide who to give a line increase to and who you don’t.”

The next recession starts in 2019

While it's largely expected that the economy will face another downturn sometime in coming years — many economists are now predicting it to begin by the end of 2020 — banks that are currently witnessing record profits are likely hoping to push off that inevitability for as long as possible.

But the fate of the broader economy is largely out of their hands. Already, some of the biggest banks are reporting a slowdown in lending and the yield curve is flattening.

Rising interest rates and a lagging housing market could further contribute to a slowdown in economic growth, putting an end to the large gains the banking industry has produced in recent years.

It could also spur the Federal Reserve under Chairman Jerome Powell to slow or even pause its interest rate hikes, a problem for banks that have seen their net interest income restrained by the historically low interest rates of the last decade.

Ongoing trade wars worsen economic troubles

The rebounding economy is the source of optimism for many bankers that their business is heading for brighter days. But there’s an easy way to turn that optimism to pessimism — mention the ongoing trade wars.

As President Trump continues to rattle swords with China, many bankers during the recent round of earnings conference calls mentioned the trade wars as a continuing source of concern.

“It’s times like this when you continue to look around the corner for the bogeyman,” Wintrust Financial CEO Ed Wehmer said during an Oct. 18 conference call. “We have to worry about the bipolar political world we live in. … Inflation related to trade wars and tariffs and labor costs, we believe, is real.”

Trump has approved $250 billion in tariffs on Chinese shipments into the U.S., and has threatened to implement tariffs on all Chinese exports, in an attempt to even what he calls a trade imbalance.

Banks that are involved in agricultural lending and export-import trade finance, have long expressed their concerns over the use of tariffs, as they are directly impacted by the policy.

As the trade war has continued, it’s reached into other parts of the banking sectors. Construction lending could slow as development projects are put at risk due to the rising costs of steel and aluminum, Will Mitchell, CEO of Contract Simply, a construction payments platform, wrote in a recent column.

Business lenders are also starting to get worried, as the war of words has infected the overall economy.

“The imposition of tariffs and escalating rhetoric with China has created uncertainty for our commercial customers,” Greg Carmichael, chairman and CEO of Fifth Third Bancorp in Cincinnati, said during an Oct. 23 conference call.

However, Carmichael said he’s “optimistic that the new trade agreement with Mexico and Canada will help alleviate some of this uncertainty.”

Regulators finalize their unpopular Volcker Rule changes

A truly scary proposition for banks with large trading operations is if federal regulators finalize an unpopular proposal to revise the Volcker Rule.

Big banks had sought changes in the Dodd-Frank Act rule — first proposed by former Federal Reserve Board Chairman Paul Volcker — that restricts their proprietary trading.

Specifically, bankers have objected to a standard that effectively bans trading positions they hold for less than 60 days.

Regulators’ May proposal to reform compliance with the Volcker Rule would replace that 60-day standard with a new methodology, known as the “accounting prong,” that applies the ban to accounts where trading instruments are recorded at fair value.

Yet bankers say the accounting prong is worse than the original standard and could lead to the ban covering several types of trades not originally intended to be targeted.

Bankers and industry representatives aired their grievances in comment letters to the five agencies working on the Volcker Rule changes.

“Aspects of the proposal would add new complexity and compliance burdens that do not have a commensurate policy benefit, which would lead to unnecessary impairment of financial intermediation," wrote Kevin Fromer, the president and CEO of the Financial Services Forum, in a comment letter.

C&I lending doesn't recover

Executives at the largest banks have pinned some of their hopes for turbocharged profit growth in 2019 on a recovery in commercial and industrial lending.

Several recent signs indicate that’s no sure thing. If a C&I loan rebound fails to materialize, it could prevent big banks from taking full advantage of variable-rate loans that reprice at higher rates.

In one sign, the largest banks may be losing some of their C&I business to smaller competitors. C&I loan demand was tepid in the third quarter at big banks like Comerica and JPMorgan Chase. At the same time, smaller regional players like Synvous Financial in Columbus, Ga., had strong C&I loan growth.

“Commercial loan growth was led in the third quarter by our senior housing vertical, insurance premium finance, small business and our CRE investment properties,” Chairman and CEO Kessel Stelling said during an Oct. 23 conference call.

Synovus said third-quarter C&I loans rose 6.6% to $12.5 billion from a year ago.

But it hasn’t been a slam dunk for smaller banks, either. Many had expected lending to take off after the corporate income tax cut in December. But some bankers have been disappointed by their results in either C&I or commercial real estate lending.

“There’s just a lot of competition,” Kevin Hanigan, CEO of the $9.1 billion-asset LegacyTexas Financial Group in Plano, Texas, said in an Oct. 17 conference call. “The much hoped-for increase in loan demand from tax relief did not come. And to the extent it has come, it’s gone to nonbank sources.”

CRE loans in the third quarter at LegacyTexas were little changed at $3 billion compared with a year earlier.

Banks aren’t going down in the C&I space without a fight. PNC Financial Services Group in Pittsburgh partnered with OnDeck to add a digital lending platform for commercial customers. And U.S. Bancorp recently hired commercial lenders in New York.

They’re also using M&A as a tool to compete for commercial loans. Union Bankshares in Richmond, Va., this month agreed to acquire Access National Bank in Reston, Va., to beef up small-business lending.

Dem presidential candidates make banking a key part of 2020 race

With the midterms almost over, expect the race for the Democratic presidential nomination to immediately begin heating up — and banking issues to take center stage.

Financial services issues played only a minor role in the 2016 campaign, with the candidates periodically sparring about the Dodd-Frank Act. But that is unlikely to be the case for the 2020 campaign, where already potential contenders are weighing in on banking issues.

Chief among them is Sen. Bernie Sanders, I-Vt., who introduced a bill early this month that would cap a financial institution’s total exposure at 3% of the nation’s GDP. That would effectively break up the six largest banks, which Sanders claims have a combined exposure of 68% of GDP.

Also in the mix is Sen. Elizabeth Warren, D-Mass., who is expected to win her re-election bid this year and shortly thereafter launch a presidential campaign. Warren, the architect of the Consumer Financial Protection Bureau, has repeatedly called for the creation of a new Glass-Steagall Act that would keep big banks from engaging in risky activities.

With Sanders and Warren likely in the running, expect other Democratic presidential candidates to follow suit. Sen. Kirsten Gillibrand, D-N.Y., who is seen as likely to run, has already introduced a bill that would allow the U.S. Postal Service to offer banking services, an idea vigorously opposed by the banking industry.

With three prominent contenders staking out positions on banking issues, others will feel pressured to do likewise, and perhaps even adopt the plans of their competitors to negate any potential advantage they might give them.

The race for 2020 is only just beginning, but banking is almost certain to be a significant part of it.

Millennial fintechs continue to make inroads against banks

Sporting tight jeans and long haircuts, they don’t look like bankers. But they have a number of things to say about the financial services industry, most of which would never be heard from the mouth of a banker.

“We're not trying to preach austerity to the client, because that’s a bummer,” Manning Field, Acorns’ chief commercial officer, told The Los Angeles Times.

Investors love them for it, skyrocketing the valuation of these millennial fintech apps (trading app Robinhood was valued at $5.6 billion in May). Young customers flock to their offerings, the majority of whom are almost exclusively mobile-first: PwC reports 50% of customers now primarily rely on mobile banking, and mobile is the only channel that has seen increased engagement in the last five years.

Some banks have tried to play dress up and create their own millennial digital-first units and apps, though there are doubts that is enough to scare up the kind of traction with young customers they need to stay relevant.

The threat is real for industry incumbents. According to a new global fintech report from Accenture, 19% of U.S. financial institutions are now new entrants, and they have captured 3.5% of total banking and payments revenues.

“Ten years after the financial crisis, the banking industry is experiencing a level of competitive intensity and disruption that’s much greater than what’s been seen before,” said Julian Skan, a senior managing director at Accenture.

Amazon applies for a fintech/ILC charter

It’s not just upstarts worrying bankers; they also continue to be worried about the financial services plans of Amazon, Google, Apple and other large technology firms.

That includes whether any of them might apply for a banking charter. The Office of the Comptroller of the Currency may have made that easier this year by finalizing plans to create a nonbank fintech charter. So far no firm has applied, but several companies have reportedly been in talks with the OCC.

Tech firms could also still use the industrial loan company charter offered by the Federal Deposit Insurance Corp. Several fintechs have flirted with or attempted to obtain such a charter, and new FDIC Chairman Jelena McWilliams has said the agency needs to give applicants quicker answers on whether they can have a charter.

To be sure, Amazon et al. could go other routes to sate their financial services ambitions, including a partnership with an existing institution. News broke early this year that Jeff Bezos' Amazon might partner with JPMorgan Chase to open checking accounts for prime customers — but nothing has been heard since.