Increased consumer confidence in 2015 led to robust demand for almost every kind of bank loan, and 2016 should be no different, said Rose Oswald Poels, president and chief executive officer of the Wisconsin Bankers Association. That’s good news for bank profits this year.
“I think you’ll see that continued optimism going into 2016 as well from consumers, so we expect continued strong, healthy loan demand in 2016,” Oswald Poels said. “You just saw consumers feeling that the economy both nationally and in Wisconsin had both rebounded and stabilized.”
Given the outlook for the overall U.S. economy, the banking industry is expected to have a modestly positive year, said Joel Huffman, senior investment director at U.S. Bank in Milwaukee. Consumers have paid off some debt, employment is growing and wages are expected to increase, and consumers are expected to have more to spend as a result. Loan demand and interest rates are trending upward.
Methodical growth in the gross domestic product and the labor force participation rate will help the economy continue to do well in 2016, said Chris Goller, regional president for Wisconsin at PNC Financial Services Group Inc.
“Typically, banks in a rising interest rate environment do a little bit better, and in a falling interest rate environment they do a little bit worse,” he said. “I would say we probably will see bank profits improve a little bit.”
Loan losses are also expected to decrease this year.
“We see credit quality as being pretty strong – we don’t see a lot of borrowers struggling dramatically, so you feel pretty good about the banking industry as you go into 2016,” Goller said.
If there’s a point of concern in the economy, it’s the manufacturing sector’s recent weakening, Huffman said.
The recent contraction in the Milwaukee-area manufacturing sector could reduce commercial loan demand, but the difference is likely to be made up by another industry that is experiencing growth, Oswald Poels said.
With the Federal Reserve raising interest rates at a gradual pace this year and banks bumping up short-term rates, it’s likely banks will see an increased profit on interest income.
“Certainly increased interest rates do help ease a little bit of banks’ net interest margins, so it does help,” Oswald Poels said.
Increased interest rates can also spur people to make decisions, such as applying for a loan before rates get any higher, Goller said.
“There’s certainly capital in banks that are willing to lend,” he said. “I think (loan demand) will be strong in 2016. I think it might even pick up. You’ve got a couple different stories going on here, and I would say a little bit of weakness in certain pockets, but on par I feel optimism about loan demand; I feel optimism about what we’re seeing.”
A factor that could weigh on banks’ profits is the continued expense pressure in the areas of technology, cybersecurity and compliance, Oswald Poels said. Most banks are investing heavily in updating their technology to meet consumer demand, putting in place cybersecurity measures to protect customers’ data, and keeping up-to-date with compliance measures as part of the ongoing implementation of the Dodd-Frank financial reform law.
“Consumers want to be able to bank on any device they have. We certainly have spent a lot of money beefing up both physical and electronic security to protect customers’ data,” Oswald Poels said. “Many banks are slowly pushing out EMV chip cards, so there’s many more that plan for a 2016 release of an EMV card.”
Among the technological innovations coming to market are biometric applications, such as fingerprint authentication, voice command, retina scanning and other quick customer identification measures. Brookfield-based financial services technology developer Fiserv Inc. this year plans to release a palm-vein reader technology from Fujitsu into its DNA core account processing platform.
“It uses a light to read the vein structure on your palms,” said Jaime Dominguez, director of retail banking and channels strategy in bank solutions at Fiserv. “When you go up to the teller line, rather than having to take out your card, swiping it, putting in your pin … all you’re doing is putting your hand over the palm reader.”
Bank mergers and acquisitions are also expected to continue at a steady pace in 2016. There were 12 bank mergers announced in Wisconsin in 2015, and Oswald Poels predicts the same number in 2016.
“The underlying trend of bank mergers will most likely continue in a broad sense just because it’s been a tough banking environment,” Huffman said. “There’s been pressure to keep costs low and (with) the increased regulation, companies are interested in managing that.”
