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Community banks must be as mindful of operational risk as their larger brethren. That was the message delivered at this year's Risk Management Association annual conference by Rick Parsons, who retired in August as an operational risk executive at Bank of America Corp.
October 20 -
Regulators are keeping a close eye on how smaller banks handle commercial lending and regulatory changes stemming from the Dodd-Frank Act, officials from various agencies told attendees at the Risk Management Association's annual conference.
October 19
Tortilla factories, solar power generation and dairy farms may not sound like the most lucrative places to make loans.
In atypical times, however, these industries are among 80 flagged as the best commercial lending opportunities based on five-year growth potential and capital intensity, based on a study released by IBISWorld at last week's Risk Management Association conference.
"You might want to call me 'picky Ricky,'" joked Richard Buczynski, IBISWorld's chief economist, during an Oct. 17 presentation, explaining some seemingly offbeat selections. "For smart lending opportunities bankers should identify industries that are in a growth cycle. … I'd avoid industries in an emerging phase and I certainly don't advocate lending to an industry in a decline phase."
After researching 700 industries, Buczynski said some of his top picks were involved with solar power, information technology and manufacturing. Tortilla production, for instance, will likely average 3.6% growth over the next five years annually. Solar power averaged 7.9% annual growth over five years. Those industries have significant equipment needs, increasing a need for loans to expand.
"You want to look for industries that are historically capital intensive, so once a recovery comes and investments start to pick up and the mood improves, they're going to have the ability and capacity to borrow heavily," Buczynski said.
Bankers will be challenged to find other diamonds in the rough, based on pessimistic assessments from other economists at the three-day conference.
"The U.S. economy is still struggling to avoid a recession," said Mark Zandi, the chief economist at Moody's Analytics, during a Monday discussion. "The odds of a double-dip recession in the next six to 12 months are about 40%. That's uncomfortably high."
Still, Zandi said there were some tenuous signs of recovery. A key indicator is commercial and industrial lending, tracked weekly by the Federal Reserve Board. A recent rise in C&I loans "suggests we are in recovery mode, not in a recession," he said. "But if that starts to roll over, were done."
(Officials for several regulatory agencies warned community banks to be careful venturing into C&I lending, due in part to the inexperience of lending officers who had once focused on commercial real estate, among other things.)
For Zandi, a recession is most likely to set in over the next six to nine months. "There's going to have to be some reasonably good policymaking to get us out of that probability," he said.
Such policymaking includes the Fed continuing an aggressive easing of monetary policy and for lawmakers to exercise fiscal restraint "in a reasonably graceful way," Zandi said. "They have to come up with some deficit reduction to convince global investors and to convince the ratings agencies that we're serious," he said.
The economists gave advice on areas to avoid along with tips on how to identify businesses that could rebound relatively well from the economic malaise.
Even commercial real estate has some bright spots, Ryan Severino, a senior economist at Reis Inc., said Monday. "We've seen the apartment market rate increase dramatically" and "the vacancy rate came down to its lowest point since the economy imploded."
Severino warned about other areas of commercial real estate. The economist said he was "not as enthusiastic" about the office market until the jobs market consistently recovers. And he said that retail real estate remains "a disaster, and I'm not pulling any punches here."
Buczynski meanwhile warned bankers not to confuse seemingly similar industries. While numerous newspapers are struggling, newspaper syndicates, which distribute content to other publications, are doing quite well.
"Content is king but the channel for which content is delivered happens to be the queen," Buczynski said. "In chess, the queen is the most powerful piece on board and it's the queen's job to protect the king."
Regardless of growth potential, panelists cautioned bankers not to get carried away in lending to a certain business niche. Discipline is critical to success, some said.
"It can get bazaar," said Dev Strischeck, a senior credit policy officer at SunTrust Banks Inc. He said, for instance, that the Atlanta banking company "used to lend to sports stars."
Over time "that leads into lending to sports teams and then into sports coliseums," he added, generated a laugh from the audience. "You have to move into this stuff very, very carefully."
