As the chief economist of the American Bankers Association, James Chessen keeps an eagle eye on bank earnings, credit-card delinquencies and other metrics that provide insight into the state of the industry. He has testified before Congress and regularly comments on industry trends. He recently spoke with the Novantas Review about the economy as we head into 2019.
Q: How would you characterize the state of the industry at this point in time?
A: The banking industry is very strong today. What really impressed me with the third-quarter results is that the performance has been consistent quarter after quarter. It’s good in every aspect. Lending is up and asset quality is the best it has been in a decade. When you look at the key areas that define banking, all of them are very strong and very positive.
Q: What are you expecting for the economy in 2019?
A: 2019 will probably not be quite as strong as 2018, but I think there is still a lot of energy in this economy. The unemployment rate is so low, there have been so many jobs created that they are creating spending and new initiatives and the desire for business to expand. The risk of recession is low even with the yield curve flattening. The tax bill supercharged the second and third quarters of this year, though the impact is expected to wane some over the course of the next year. Interest rates will rise. It will take a bit of time to see whether they want to keep pushing up toward 3%, which is the long-term goal. We need to make sure that our expectations will not be that we will have a repeat of 2018.
Q: There is so much economic uncertainty around the world right now — from Brexit to tariffs. Are these global issues likely to impact banks?
A: There are a lot of things happening in the world and any time there is uncertainty it makes people nervous — even in the U.S. where the economy is quite strong. The real question is whether uncertainty gets pushed to the point where it freezes business decisions — where firms are unlikely to borrow to expand or hesitant to hire more workers. I don’t think we are there yet in the U.S., but there seems to be more of a hesitancy of established firms to borrow today than the new start-ups that are anxious to have any kind of funding. Over the last 10 years, there has been cautious behavior on the part of banks and borrowers to make sure they are looking out several years to see if they will have the business to support the loans they are taking out. That is probably a good thing.
Q: What will be the industry’s biggest challenges in 2019?
A: We hear repeatedly that deposit gathering is going to intensify and be increasingly a challenge. With rising rates, there are other opportunities for people to put money in other kinds of investments. Those alternatives are starting to bite a little. Banks also have high LTV ratios. They are looking to see how they are going to be able to fund the demand from borrowers. That becomes more of a challenge as rates rise and the yield curve steepens. Competition will remain very intense for loan customers. There’s always a little bit of caution that comes with that late in the cycle.
Q: How would you describe the state of the lending business? Who is borrowing and what are they using the money for?
A: Quarter after quarter, we have seen lending strong across almost all major categories. The only category that hasn’t performed well is home-equity loans and equity line of credit. What I’ve noticed is that the demand seems to be starting to fade a little in CRE and some business lending where we have had strong growth over the last couple of years. CRE seems to be built out in many urban areas and banks are getting more cautious about how aggressive they want to be in that space. Urban areas have seen very strong growth over the last five or six as populations move into major cities. We see far less of that in rural areas. There are no jobs where housing is affordable and where there are jobs, housing isn’t affordable. That urban-rural divide has been significant. A banker also mentioned to me the other day that warehouse lending is red hot, reflecting the Amazons of the world looking for distribution of online products. Consumer lending is very strong and that is because of the jobs that have been created. The one area is that is not so great is the ag-lending sector. There’s too much rain in the east and not enough rain in the west.
Q: Do you anticipate that the new Congress will take actions that impact the banking industry?
A: This year’s S.2155 (which rolled back some banking rules) was a bipartisan bill that made improvements in the approach to banking. Any legislation moving forward has got to have bipartisan support. It doesn’t mean that things won’t happen this year even though the House and Senate are under different leadership. We remain hopeful that there’s going to be a hard look at reforming cannabis banking now that so many states have legalized marijuana. We think data security is an area that will be ripe because there is no slowdown in criminals trying to hack information and steal credit cards. We think there needs to be agreement on the notification and liability that is provided. BSA, AML and GSE are other ones where we think there may be some bipartisan efforts. All of the leaders are looking at a tailored approach to regulation and looking to areas where they can maintain safety and soundness, but allow banks to be able to engage in more activities.
Q: Many banks are struggling to acquire and retain deposits as rates rise. How is that likely to impact the bottom line for banks in 2019?
A: Obviously costs will rise as deposit competition heats up. It really depends on how strong the loan demand is and whether there is a reasonable margin. They key question is what happens to margins and how quickly the repricing occurs.
Q: Are fintechs and other non-bank competitors making a meaningful impact on the economy?
A: The fintechs have turned up the heat and increased the competitiveness and focus on providing customers with what they expect in a very digital world. The talk has shifted from merely looking at fintechs as competitors to looking at them as partnerships. That is a significant change. The fintechs always make headlines because they are the shiny new objects, but what is missed is the significant investments that banks are making in technology to provide services that customers want. The banking industry is quite capable of stepping up and meeting the needs of their customers. It’s an interesting environment, but it’s all good for the customers. There is no doubt that fintechs have added a new element into the banking world. The real defining moment will come if the economy turns down and the supply of funding for fintechs declines significantly. Relationship banking is really important and that was proven out through the financial crisis when other types of lenders disappeared and mortgage brokers vanished. Everybody is caught up with a fancy interface but when push comes to shove, you want to know there is a real-life person you have dealt with before who understands your business or your family needs. That still remains core to the banking industry.
Q: Do you have any words of wisdom or advice for senior bank executives as we head into 2019?
A: Having gone through many financial crises and business cycles, rate-cycle competition is always a challenge and a time when you need to be most cautious. Everybody is looking for the signs that things will slow down. If there is a realistic sense of growth in the economy, it is easier to make decisions. Debt levels in the U.S. and globally matter a lot and are a big risk. The U.S. deficit is projected to grow rapidly and global debt levels are much higher today than they were before the financial crisis. These are big issues that will have consequences in the long run. The banking industry understands that debt can be a very good thing and stimulate growth, but too much debt can create problems, particularly when the debt is created by the government or internationally. This is a really good time for the banking industry and to have trifecta of solid earnings, strong capital, and great assets is really an ideal situation for banks. It makes it more important to protect that going forward.
Director, New York