As 2022 comes to a close, BizTimes Milwaukee managing editor Arthur Thomas caught up with Rose Oswald Poels, president and chief executive officer of the Wisconsin Bankers Association, to talk about how the state’s banks performed this year, and the outlook for 2023. The following conversation is edited for length and clarity.
BizTimes: What kind of year has 2022 been for Wisconsin banks?
Rose Oswald Poels: “Overall, it has been a really good year for the banking industry. We continue to make a lot of loans, we have a lot of liquidity, deposit balances are still high, they have been trickling off in the last couple of months, but for most of the year they’ve remained at unusually high levels, so that just means that banks have that much more money to lend out into their communities.
“As I mentioned, we are starting to see a little drop off in deposit balances. It’s gradual, certainly not anything drastic, but I think as people are really feeling the pinch of higher prices in food costs, energy costs, things that really hit our pocketbooks every day, we are seeing consumers spending their excess savings to pay for some traditionally basic necessities.”
Does that work in both directions? People are keeping money in savings because there’s inflation, and they know, ‘I’m probably going to need that money,’ so they’re less likely to go spend it on discretionary things. At the same time, they start eating into their savings because costs are going up.
Poels: “Yeah, I think with the dramatic increase in interest rates and sort of the impact that’s having on prices generally, the second half of this year, we’ve seen consumers be a little more cautious in their spending and using their money to pay for necessities. Credit card balances are going up, but that doesn’t mean they’re not still shopping. I think retail numbers are still looking very strong and certainly from a bank’s perspective, loan defaults, for example, and credit card defaults, are still very, very low, so there’s no immediate concern that consumers are imprudently spending their money. They’re being cautious, at least here in Wisconsin, and our banks are seeing that reflected in regular payments on all types of loans.”
What has the rising interest rate environment meant for bank finances?
Poels: “For most banks, I think they’ve been able to take advantage of the greater net interest margin. ... The loans that are variable rate in nature, they are able to reprice those as interest rates have gone up, and they haven’t had to increase their deposit interest rate payouts at the same pace. With competition being what it is, rates are going up for CDs and savings accounts to benefit consumers, but they’re not going up at quite the same pace that loan rates are. In the short term, banks are certainly benefiting from that greater spread in net interest margin after frankly living with years of having really tight net interest margin, so it’s a little bit of fresh air for our members to see that spread grow a little. How long it will stay really does remain to be seen. Are we going to be in a recession next year? Will consumers struggle to keep pace with their loan payments like they’re doing today?”
Talk about that potential recession for 2023. How is the health of banks heading into this period of uncertainty?
Poels: “Banks today are in a very strong, healthy position. I mentioned earlier the high deposit balances, overall capital levels are very healthy going into what could be a recession next year, so they are in a very strong position to weather some hurdles in the form of greater consumer loan defaults and payments. They also are very well diversified.”
How has loan demand evolved over the course of the year and where do your members see it heading into next year?
Poels: “During this year, overall lending has been strong. Definitely saw the decline in home mortgage lending, so those numbers quarter-over-quarter and even year-over-year are down. Ag lending, generally, is a little bit down as well. That’s not completely surprising. Farmers also are in a very healthy, strong cash position, and so a lot of farmers have chosen to use their savings instead of borrowing to put crops in the ground or to pay for some equipment. And then commercial loan demand continues to be up a little bit.
“I think heading into 2023 – now that we’ve had the election and for the most part things are generally status quo – I think people at least understand what the next few years politically look like, which always brings a little more stability to business owners and their decision making. Looking ahead to 2023, we expect business loan demand to continue to remain steady. I think we’ll continue to see slower home mortgage lending and interest rates continue to rise. The Fed is certainly forecasting they’re going to keep going up, it does put pressure on the housing market.
“Overall, bankers are predicting a recession next year, so I think they’re also making sure they manage their own financial statements to be able to withstand some of that. To the extent that maybe there’s a little less loan demand than what the last few years have seen – particularly in home mortgage lending – they have to make adjustments maybe on the expense side in order to help mitigate and keep their overall financial picture strong. They’re definitely making adjustments, but as I said earlier, they’re very well positioned for this potential recession.”
On lending practices and willingness to lend money, how has that evolved over the course of this year and where do you see that going next year? Are there going to be generally tighter conditions going forward?
Poels: “The broad guidelines of credit underwriting haven’t really changed for banks throughout time, frankly, but obviously people’s individual situations do change, and so, as they go through a risk review of a business borrower or a consumer borrower, they’re looking to make sure that that individual is in a good financial position themselves. Do they have a good business plan? How long have they been in business? Do they have savings that help withstand some emergency situation? Are there supply chains still affecting this particular business, and what does that look like for their revenues ahead? And then doing some kind of stress testing against the business itself on how well they’re able to withstand a recession if one would come.”
Anything else to highlight about the outlook for banking heading into next year?
Poels: “The only other area is the merger activity of the banking industry. This year, we definitely saw a pretty healthy pace of merger activity; we had 12 announced mergers this year of a Wisconsin bank. Looking ahead, I do think we’ll continue to see mergers occur, I do think it will slow down a bit because of the economic environment and as it becomes a little more uncertain what a bank’s own balance sheet might look like, which affects pricing of a bank when they’re looking to sell. So, I expect M&A activity to continue, but maybe not quite at the pace that it was this year.”
