John A. Allison retired as chief executive of BB&T Corp. of Winston-Salem, N.C., more than two years ago, but he remains engaged in discussions on the economy and the banking industry.
Allison, who is noted for his candor, shared his views on community banking, mergers and acquisitions and the possible shortcomings of private equity in an interview at Wake Forest University, where he is a professor. Below are excerpts from the interview:
What is your assessment of the economy and where are we headed?
I am fundamentally concerned about the economy. I'm not sure if we're going to have a double dip, but I am of the opinion that we're facing slow economic growth for a long period of time. We made some bad mistakes in real estate, really driven by governmental policy. There is a lot of anxiety among business people and a lack of confidence. We're running massive deficits, may have taxes running up and regulatory environment is the worst of my 40-year career. I don't project any type of economic disaster but I think we're in for several years of tough economic times.
What are the roles of banks in this?
Banks need to be looking for rational investment opportunities. I think they're faced with a couple of basic challenges. The real estate markets have not cleared. Secondly, the regulatory environment, while I think it has gotten a little bit better recently, is still terrible. I think regulators have tightened lending standards. They have overdone it. They always do that. They have made it difficult for banks to extend the type of credit that drives economic growth. I think bankers need to be looking for opportunities but it is a difficult time to grow loan volumes.
Where rational investment opportunities exist?
Automobile finance is probably going to do a little better. But there are not a lot of niches in a slow growth economy. It is not an easy environment to generate good quality loan investment. And as the yield curve as tightened up it has made it more difficult for bond portfolios to be profitable, which is putting a huge premium on operating efficiency.
Banks are going to have to figure out how to get some more fees. We have to replace the debit card revenues that the Durbin amendment took away, which by the way is bad public policy. Price controls never work. They are very destructive. … It is very expensive for the industry. Banks have to be really focused that making sure they have profitable clients, which means that some of your clients are probably going to have to be priced out of the marketplace. It is not good public policy but unfortunately will have to be necessary. That's not the industry's fault. The FDIC and the regulators have created the kind of environment where you can't get overdraft fees and you can't get debit card fees. Not surprisingly a lot of consumers aren't going to quality for banking services without paying much higher prices.
While at BB&T, you were involved in numerous acquisitions? Where do we stand with bank M&A?
I am very concerned about the long term viability of the community banking business. BB&T started as a community bank and I am a community banker in my soul. I think the regulatory environment and the struggle in the real estate markets are going to make it tough for community banks to be successful. Not that they can't stay in business but it is about generating satisfactory returns. I see in the long term a pretty major consolidation in the industry. I don't think consolidation will occur until the larger bank stock prices get better and also until people perceive that they can manage the risk in real estate markets. … A lot of community banks have a large portion of their assets in real estate loans and it is hard to underwrite that kind of risk. Ultimately I think we're going to have a pretty massive consolidation of community banks but I don't think there is going to be great pricing unfortunately. I don't think the community bank model — with the regulatory environment we have and with the real estate markets not recovering for a number of years — is a very strong economic model. In fairness, its not that individual banks can't be successful, but I think that will drive a lot of the consolidation.
Do you see the emergence of more 'super-community banks' of $20-30 billion in assets?
I think we'll see more of those kinds of deals with a mixed success rate. Some are going to be very successful and some aren't. The ones that aren't successful may see a second round where they are acquired. The drive will be for efficiency. You'd like revenue growth but it is hard to see where the revenue is coming from in the next five years. Mergers will largely be driven by how to get more efficiency, which means more cost cutting.
Employment in the banking industry will continue to decline. A percentage is hard for me to guess but I wouldn't be surprised to see a 5-10% reduction across the whole industry. If Bank of America cuts 10% of its staff, which a lot of people think they're going to do, it will bring down the cost structure and they will be more competitive. It will force others to be more competitive. If you can't get revenues, I think there will be a major rationalization in the human resources function of the business. And there will probably be a rationalization of the branching network.
Do you have any advice for current CEOs?
If there is any lesson from the financial crisis it is to run your business well on the fundamentals. There are no free lunches and there are no short cuts. Be really clear about the vision and mission of your organization. Treat your clients well. Invest in your employees. Maybe you can't have too many of them but you need to help the ones you have to become thoughtful people. Many financial institutions let go of the basics and did things that were bad for their clients, bad for the economy and bad for their employees. Run the business well. While you may not make a huge amount of money but over time you'll be more profitable, more successful, and we won't have anything to apologize for.
How tempting is it today for bankers to return to bad habits?
Unfortunately, some of these private equity firms that are buying up banks are going to be tempted to take inordinate risks. Some of these rollups by private equity firms could turn into disasters. Few will be great economic successes because I don't think private equity owners really understand the business. It's the kind of business where you can make a lot of short-term profits by taking disproportionate risk and I think you'll see some of those players make those kinds of mistakes. Then the industry will get blamed because they went down the wrong path. Not all of them, but some of them.
