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2015-09-25 / Front Page

Boosting bank’s profitability amidst challenges

Regional Business Analyst

For the past six years, banks have operated under very challenging circumstances – zero percent interest rates, slow loan growth, home foreclosures, a fall-off in fee- based business, uncertainty over new federal regulations, competition from nontraditional institutions not bound by the same regulations, rising operating costs for regulatory compliance and securing computer networks against cyberattacks.

Banks focused on reducing costs as revenues declined, causing wave after wave of branch closings, consolidations and mergers. While most of the challenges remain to some degree, the U.S. banking industry is entering a new phase in its post-crisis era, with a greater emphasis on boosting profitability.

According to a report by the Deloitte Center for Financial Services, which performed an analysis of industry priorities and anticipated trends based on interviews with leading bankers, the financial services industry is on more solid footing than it has been in years.

The U.S. economy continues to improve with real GDP growth expected to increase from 1.9 percent last year to 2.3 percent by the end of the third quarter this month. Although economic concerns remain in Europe, some emerging markets, and more recently in China, the increasing economic vitality at home is spurring new loan growth, the mainstay of the banking industry. Multifamily real estate and auto loans have both increased 30 percent from 2011, according to the report.

“We’re seeing very good loan growth, probably the best we’ve seen in five years, and that’s chiefly because of the economic recovery,” said Joe Bower, president and CEO of CNB Financial Corporation/CNB Bank in Clearfield, who was elected to the PA Bankers Association Board of Directors in May.

“In general, people have more confidence to spend some money and take financial risks again, while during the many months of the recession, they were holding on tight to their wallets, fearing that they might lose what money they had if they joined the ranks of the unemployed along with millions other Americans or if their business went bankrupt.

“Now they’re thinking about building a new home, buying a new car, adding on to their business or expanding the number of shifts at their manufacturing firm.”

Deloitte’s report states that commercial and industrial lending is expected to be a primary driver of growth as the economy 4improves. C&I loan balances have increased nearly 40 percent from the first quarter of 2011, driving over half of the asset growth this year.

To be successful, Deloitte advises that banks extend digital initiatives from consumers to business customers by adding mobile cash management tools and predictive analytics that anticipate and manage customers’ short-term credit needs.

“We’ve done commercial and industrial loans for 30 years, and we’ve seen much growth in that area recently, with loans picking up over the past two years,” said Bower.

Although profits have surpassed historic records, return on equity (ROE) is still below pre-crisis levels and has yet to get into double digits – it is currently at 9.30 percent. In 2007, big banks such as Goldman Sachs earned nearly 40 percent return on equity. Two years later in 2009, that percentage was cut in half.

Consistent growth is likely to take several years, but 2016 could be a turning point where ROE gets back into double digits.

“Return on equity hasn’t gotten back to pre-recession levels and even if we get back to historic earnings, it will take a much longer time to get there because of the higher capital reserves Dodd-Frank and the Basel III regulations require us to have for different assets,” said Bower.

“That’s one thing banks are struggling with, and in the industry, we talk about what’s the new norm, and I think the new norm is that if you are at a 10 percent ROE, you’re considered doing very well.” .

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