Q2 senior solutions specialist - and long-time data guru Gita Thollesson provides a look at some of the insights coming up in the State of Commercial Banking: Jan. 2022 Market Analysis webinar and report.
Helpful Links
- State of Commercial Banking 2022 Webinar
- 2022 Commercial Loan Demand: Cause for Cautious Optimism?
- Commercial Loan Pricing Market Update: 2021 Review
- Commercial Loan Pricing Market Updates
Questions? Comments? Email Jim Young at jim.young@q2.com
Transcript:
Jim Young:
Hi, and welcome to The Purposeful Banker, the podcast brought to you by Q2 PrecisionLender, where we discuss the big topics on the minds of today's best bankers. I'm your host, Jim Young, senior content strategist at Q2. And I'm joined today by Gita Thollesson, senior solution strategist at Q2. That's her official title, but regular podcast listeners will know her probably better as the purveyor of all sorts of commercial banking data insights. And each January, Gita shares some of that knowledge in her webinar, The State of Commercial Banking, and the next one is coming up on January 27, 2 PM EST.
We have a link on the episode page where you can register for that webinar event. And a lot of you probably will be receiving emails from us about it, so plenty of opportunities to register for the webinar. But first in today's discussion, we'll give you a bit of a preview. We'll touch on some of the topics that Gita will cover in the webinar, and maybe share one or two of her findings. So Gita, welcome back to the podcast.
Gita Thollesson:
Thanks, Jim, good to be here.
Jim Young:
And I'll start you off with really the same question that started off last year's State of Commercial Banking Preview Podcast, and this is for those who aren't familiar with this webinar and it's set up. Can you explain what this presentation is?
Gita Thollesson:
Sure. So this is an analysis that we run every January on the state of the banking market. We do a retrospective on the past year, and we share intel on key trends that we're seeing, and talk about what lies ahead for the coming year.
Jim Young:
Okay. And the data that you're analyzing, to be able to produce this report, can you tell us a little bit more about that?
Gita Thollesson:
Certainly. So we draw on several different data sources for this analysis. There are a couple of public sources and then some proprietary sources. On the public side, we use data from the Fed and FDIC. And then on the proprietary side, we pull data on actual commercial relationships from our own data repository, so it's loans, deposits, and other ancillary business from PrecisionLender clients. That's over 150 commercial banks and other financial institutions ranging from the smallest community banks to the largest national banks. From those financial institutions, we've tapped into two distinct data sources. So one of those data sources captures actual relationships that are on the books. And the second shows what bankers are pricing today, and that provides an even more current view of what's happening in today's market. And then in addition to the PL data, we've also tapped into some other Q2 sources in this report, and that's something that we haven't done in the past.
Jim Young:
Okay. I also know in putting together this report each year, you make a conscious effort to make this more than "just a benchmark report." There are though some old standbys and then there's some newer material. So I guess, can you tell us what some of the old standbys are that you're checking on and then also what are some of the newer things you're looking at and then how you decided on those?
Gita Thollesson:
Yeah, absolutely. So in terms of the old standbys, we always like to look at the state of the loan market from the perspective of loan volume, credit risk, as well as pricing. And we also typically take a look at cross sell, whether that's in terms of deposit balances or other fee-based business, though the specific analysis that we do is varied from year to year. In terms of some of the new things that we've looked at this time, I'd say the impetus behind some of this new analysis has really been the low rate environment that we're in. Which obviously has led to a pretty sharp erosion in NIM. And so, a couple of new things. First, we wanted to look at non-interest income for the industry as a whole. We've actually measured the growth in non-interest income, which has been one of the key tactics that commercial banks across the country have used to mitigate, at least, the free fall in NIM.
So we want to just measure how much of that's actually happening. The second thing that we looked at was non-credit business from our proprietary database, but from a slightly different lens. And it really stems from this focus on primacy, in terms of looking at the impact of non-credit business on profitability, on relationship profitability. So we wanted to measure just how impactful that business is on yield, so that was also new this time. And then probably the third new item really relates to transformational changes in banking. We saw a lot of that in 2021, things like SOFR, obviously, which has really now taken hold in the market, as well as the digital evolution in banking. So those were new pieces that we hadn't really explored so much in the past and taken a closer look at those items.
Jim Young:
Okay. And the primacy is ... It's one of those topics. It's not new to banking, but it really did seem to come front and center this year, almost reaching buzzword status. Is there any data that really points to why that happened in 2021?
Gita Thollesson:
Yeah, I mean, it definitely isn't new. I mean, I've been in banking for almost 35 years and as long as I've been in banking, people have talked about how important relationship banking is. But I think what changed in 2021 was that not only did we have this sharp drop in rates that we have. Really, every time there's a recession rates drop. But what happened with the pandemic, so really March of 2020, was when this all started, was that NIM eroded without banks taking the traditional steps they take during a recession. Typically, banks will raise pricing. They'll implement rate floors. They'll pull back on credit risks or tighten underwriting standards. And, at least, help to mitigate the drop in NIM. That didn't happen. And on top of that, we have this ultra-competitive environment where banks were flush with liquidity, just looking to put those funds to work.
And as a result of that, NIM continued to erode even into 2021. It really became evident that the only way to achieve profitability was to really step up focus on an ancillary business. And it's not really just about profitability, it's also about stickiness of holding onto your existing customers. It's just so hard to win a new piece of business that you don't want to lose that customer. Primacy is about maintaining long-term relationships and maintaining profitable relationships. But really it's that rate drop and spread erosion that really stepped up the need to focus on primacy last year.
Jim Young:
Okay. One more primacy question here, and I'm going to be careful, because I know we don't want to dig too deep into this. This is a preview podcast. It's not a... For the real meaty stuff, you've got to come into the webinar. But I did notice that most of the time what you're looking at, a great majority of the time, you're looking at industry-wide data. But for primacy, you did look at some individual banks, and I'm curious why you decided to go that granular?
Gita Thollesson:
Well, just because aggregates can be misleading. And we saw such variation across the banks that we work with. Some banks do better than others. When we looked at the details, we saw that there are individual banks that have really stepped up focus on primacy. They've implemented very specific tactics to drive primacy, and we're seeing it in their results. We're seeing much higher success in terms of converting credit only accounts to broader relationships, or selling more deeply into existing clients. So really showing those individual results has been very revealing about just how much you can achieve even in the current rate environment, if you put the right focus on this initiative.
Jim Young:
You mentioned you've been doing this for 35 years. And you know so much about the cyclical nature of banking. But on the other hand, last two years have been, shall we say, a little bit unusual.
Gita Thollesson:
Absolutely.
Jim Young:
Yeah. So when you're sorting through that data, and you're looking to try to make some analysis, some conclusion, how do you differentiate between what's happening that's just this is going to lead to the next stage in a cycle versus this is something that's, for lack of a better word, outside the cycle?
Gita Thollesson:
Yeah. I mean, I have seen a few cycles during my banking career. And normally the typical cyclical trends are you enter a recession, loan demand falls, companies stop borrowing, stop expanding, banks become more conservative on credit and on pricing, and rates are typically cut. Then things improve and banks loosen up. They open the lending spigot, maybe relax underwriting standards, and the cycle continues. But this recession was like no other. So the risk in the market that we saw at the beginning of this recession wasn't due to anything that borrowers did wrong. It was a global pandemic, so banks couldn't tighten too much, and they couldn't raise pricing either. There were also certain pockets of the market that were disproportionately impacted by the pandemic, so obviously, hotels, full-service restaurants. It was a very different outcome than the typical recession.
And they were also some pretty dramatic changes that accompanied this recession. So unlike other recessions, this one came along with a nationwide shutdown, so virtually no travel, no entertainment, no leaving your house for a while. So it created a whole new dynamic where people had to bank from home, and companies had to operate remotely, as well. And that just accelerated a trend that was already long in the works towards this shift in digital banking, but really fast tracked that trend. And that led to just fundamental changes in the need for digital banking, virtually and end to branch banking in the way that we've historically known it. And those are long lasting changes. It's not really cyclical in nature. It's just long lasting transformative changes in banking that will certainly continue in the years ahead.
Jim Young:
Okay. Just a couple more questions here. One again is another one I've asked on previous preview podcast. But you follow and you tracked this data, was there anything that you saw that was maybe a little bit unexpected?
Gita Thollesson:
Yeah, I would say that probably the one item that really surprised me was when we surveyed bankers. It was actually during a round table on primacy, and it was clear that everybody felt that primacy is absolutely critical in today's environment. But when we surveyed the bankers, we found the the majority of banks actually didn't have a concrete plan for achieving primacy. So there was a recognition that you've got to get there. You've got to get the cross sell, it's so important. And yet, a lot of people just didn't have any specific concrete steps to get there. So that's something that hopefully will change in 2022, but that was a bit of an eye opener. I thought that banks would be a little bit further along in that journey.
Jim Young:
Okay. One last question here. And again, I'm not going to make you go in too much detail, because we want folks to attend the webinar. And again, the webinar is January 27th, 2:00 PM Eastern Time, and links to register for it will be in the show notes, the episode page for this, on explore.precisionlender.com. Having said all of that, how do you feel about, well, the state of commercial banking as we move into 2022?
Gita Thollesson:
Well, a month ago, I would've said optimistic. Economic signals were strong, GDP forecasts were up, unemployment was down, there were enough inflationary pressures to suggest that maybe there'd be resurgence in loan demand. Now I'd say over the last couple of weeks, I'd have to maybe temper that to say cautiously optimistic. We're in a spot right now where there's been a resurgence of the pandemic, a labor shortage that could very well stall growth, so a lot of uncertainty as I sit here with you today. I'd say probably the only thing I can say with confidence is that 2022 will look unlike any other year in the past. I think the transformative changes that we've talked about already will reshape banking, and it's going to be a very different environment than what we've seen historically.
Jim Young:
All right, great. Well, Gita, thanks so much for coming on, and really looking forward to your webinar on the 27th.
Gita Thollesson:
My pleasure.
Jim Young:
And again, that is the State of Commercial Banking Webinar: January 2022 Analysis. So that'll do it for this week's show. And again, thanks so much for listening. And now for a few friendly reminders, if you want to listen to more or podcasts or check out more of our content, you can visit the resource page at precisionlender.com, or head over to the homepage to learn more about the company behind the content. If you like what you've been hearing, please make sure to subscribe to the feed in Apple Podcast, Google Player, Stitcher. We'd love to get ratings and feedback on any of those platforms. Until next time, this is Jim Young, Gita Thollesson, and you've been listening to The Purposeful Banker.
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