I’m back from the Consumer Bankers Association’s “CBA Live 2011” conference in Orlando, where I was one of some 800 attendees, including about 350 bankers. This is only the second year for CBA Live--but given its quick success, you can count on it becoming an important annual event in the banking industry.
This year’s edition was very worthwhile. It featured a few general sessions, but most of the time was devoted to eight specialized “tracks:” Automobile Finance, The Community Reinvestment Act, Default Management, Deposits, Fair Lending, Home Equity, Small Business, and Student Lending. I spent the bulk of my time at the Deposits track, to hear about banks’ planned responses to the various regulatory and legislative challengers that have emerged in recent years. Here are my key observations from the conference:
1. The new regulatory and legislative changes will crimp banks’ profitability--but not by as much as low interest already rates have. The revenues loss from the CARD Act, (which restricts card lending), Reg E limitations (overdrafts), and the Durbin Amendment are generally estimated to be about $15 billion for the industry. But as Aaron Fine of Oliver Wyman pointed out, the roughly 100-basis-point compression in deposit spreads the industry has seen over the past decade has reduced industry revenues by about $45 billion.
In hindsight, the banking industry offset part of the negative impact of lower rates though a growing reliance on credit card fees, overdraft fees, and debt interchange fees, but these sources of fee income are now being rolled back.
2. Not much discussion about the need to reduce retail distribution costs. I feel like I’m turning into a chorus of one on this topic. Most bankers may disagree, but I believe banks need to get serious about cutting their retail banking expenses, especially distribution (read: branch) expenses. Hello! The industry just lost $60 billion in retail banking revenue! Non-branch distribution channels, notably online and mobile, are now solidly mainstream among many users. Branch transactions are steadily declining at a 5% annual rate. Soon many customers will have no reason at all to visit a branch—not even to make the occasional deposit. Too many retail bankers refuse to even consider the possibility that their sprawling branch networks are about to become high-cost millstones, and seem to be assuming instead that higher interest rates will bail them out. Not likely! Retail bank personnel expenses need to be reduced, as do occupancy expenses. Branches will certainly remain important, but the cost of operating branch networks needs to be reduced.
Based on what I heard at the conference, retail banking executives are not as concerned as I am about their revenue decline (and expense status quo) at retail. They should be.
3. Bankers are frustrated and angry about the new legislative and regulatory environment. Bankers may not be happy with their new regulatory world, but at lunch on Monday, U.S. Bancorp’s CEO Richard Davis provided some perspective (and did everyone a favor) when he advised, essentially, to “accept it.” The regulatory pendulum has swung too far in the direction of overly restrictive, Richard noted, but that’s exactly what everyone should have expected given the magnitude of the financial crisis.
His message to follow bankers was that “we’re at halftime.” Which is to say, our side has seen what the other side’s plays are, we’ve seen how our plays work, and we know how the refs are calling the game. We have all the information we need to adjust, and come out with a better game plan for the second half.
What Richard didn’t come out and say—but it was clearly his implication—was that all the tumult, regulatory and otherwise, of the past three years will produce some clear winners and losers.
Bank stock investors clearly view all the recent changes that have gone on as a negative for the industry. I do, too. But Richard is right: some incredible winners will emerge, as well.
4. Core deposits are more important than ever. Bank regulators believe one reason a number of sub-$5 billion banks failed this cycle was the banks’ ability to fund reckless loan growth with non-core and out-of-market deposits. While I believe this is true, too, regulators have (surprise!) overreacted to the problem by requiring a broad-based reduction in banks’ ability to take in non-core and out-of-market deposits.
More broadly, the FDIC is also tightening its definition of what counts as a core deposit. For example, the agency will likely determine that all small-business deposits in excess of $1 million should be assumed to be run-off for liquidity purposes, regardless of the history of the depositor.
5. Scott Pelley’s three qualities of survivor / thrivers through adversity. CBS’ Scott Pelley was keynote presenter Sunday night, and was outstanding. I have seen (and have given) a fair number of presentations to large audiences before, but I’ve never seen a large audience more engaged in a presentation than this one.
Pelley simply told a number of stories about people and situations that he had encountered during his career as a 60 Minutes correspondent. His overarching point was that the survivor and thrivers that he had met had at least one of the following three characteristics:
· “No means go.” Pelley gave examples of individuals who were told that something couldn’t be done, but they didn’t accept that and did it anyway!
· “The attitude of gratitude.” Those who survive and thrive, according to Pelley, have a great appreciation for many of the things that others take for granted, like the ability to travel on planes today.
· “Love large.” Pelley says many survivors and thrivers are committed to something larger than their personal own success, such as a charity or some other cause.
In 2009, the CBA unexpectedly lost its president, Joe Belew, to a heart attack. Joe was an incredible man and an ideal president for the organization. But the CBA’s new president, Richard Hunt, has impressively picked up the baton and is doing a great job of leading.
I know of no other investors who went to CBA Live 2011. It’s their loss; they don’t know how much great information they missed. I guarantee I won’t miss next year’s CBA Live in March in San Antonio!
What do you think? Let me know!