The year 1982 was a historic one for the banking industry as the process, begun in 1980, of deregulating assets and liabilities was completed; 1983 promises to be one of adjustment to the new structural and competitive realities created.
The industry, however, will be greeting the challenge of the New Year with a bad hangover caused by record numbers of failures and consolidations, international upheavals and a dramatic shift in interest rates. The combination is bound to produce a mixed effect in terms of profits and interest rates for consumers.
A year ago savings and loan associations and mutual savings banks were on the rocks, pounded by high interest rates that left them with heavy operating losses. Then rates declined and Congress passed landmark legislation granting government assistance, where needed, along with the opportunity to compete more directly with banks and other financial service industries.
In the past two years the S&L industry experienced a 200 percent decline in earnings, with the trend finally reversing late last fall. The bottom has been reached, but the full recovery will take several years, according to Jonathan E. Gray, an analyst with Sanford C. Bernstein & Co. in New York, who predicts a dramatic rise in earnings in late 1983 and 1984. Loan demand is expected to double or triple by next summer, provided interest rates continue to fall.
Allan G. Bortel of Shearson/American Express in San Francisco predicts record profits during the last half of 1983 for the large, West Coast stock associations. Lending and fee income could double from last year's low levels. For the country as a whole the majority of S&Ls are expected to be back in the black. Possible offsets to this scenario are a rise in loan delinquencies, a rate war over deregulated accounts or an increase in interest rates.
For those S&Ls still too weak to stand on their own, the Federal Savings and Loan Insurance Corp. plans to issue promissory notes. By the end of 1983 some 500 S&Ls will be eligible to receive $850 million in aid.
Another 90 are not expected to survive. (Since the start of 1981 the number of savings and loans has shrunk by 15 percent to 3,800.)
Mutual savings banks will be lucky to break even, according to George Hanc, chief economist of the National Association of Mutual Savings Banks. Market rates and bonuses paid on the money market and Super NOW accounts will wipe out any profit for the industry as a whole. The Federal Deposit Insurance Corp., which insures mutuals, expects them to be back in the black in March, however. (Fifteen banks received $175 million in FDIC aid last month.)
The outlook for commercial banks is likewise mixed, with the large money center banks in a much better position than smaller regional banks, according to Gray. Overall industry earnings should be up 4 to 6 percent or less. That includes gains of 10 to 15 percent for money center banks and declines of 10 to 20 percent for the 13,000 or more banks with assets under $750 million. Large regional banks' profits will grow at an average of 4 to 6 percent.
Profit margins will be affected differently depending on how much each bank's cost of funds is increased by having to pay market interest rates on checking and savings accounts. For smaller banks, which currently enjoy a much larger percentage of passbook and no-interest checking accounts, the change will be greater.
Should federal regulators decide this spring that businesses should be allowed to open Super NOW accounts, earnings pressures would be greatly exacerbated, Gray said. He does not believe, finally, that problem loans overseas will materially affect the big banks' bottom lines.
Stanley Wells, a bank analyst with Keefe, Bruyette & Woods in Hartford, Conn., foresees industrywide gains this year of 7 or 8 percent. That breaks down as a 9 percent gain for money center banks and a 6 percent gain for large regional banks.
The creation of a new accounts by Congress to counter money market mutual funds may trigger substantial shifts of dollars within the banking system. Market Facts, a Chicago research company, projects $70 billion will flow into money market accounts during this year. (As of Dec. 22, the Federal Reserve reported $52 billion already in the new accounts.) Half of the $70 billion will come from customers with passbook or low-yielding accounts.
The Super NOW account, introduced last week, will attract another $22 billion over the longer term. About $17 billion is expected to flow out of money market mutual funds, according to Market Facts' vice president Richard Ross. Since the new account was announced in November, money market fund assets have diminished by 11 percent.
Most experts say, however, it will possible to declare a winner in the deposit sweepstakes only when banks and thrifts have stopped offering promotions and their rates are comparable to those of money market funds, perhaps a month off.
Others speak darkly of the possibility of a prolonged rate war, such as the airlines are now waging. Even if the depository institutions recapture large sums, how will they invest them profitably? The new accounts may keep loan rates higher than otherwise warranted by the economy.
Bankers warn of the specter of mismatched portfolios. (How can you make 30-year mortgage loans with funds that customers can withdraw daily?) Should deregulation result in costly cut-throat competition and a dearth of long-term credit, look for some legislators to call for reregulation.
Most of the deregulation of financial institutions this year is expected to occur in the marketplace rather than in Congress or the regulatory agencies. Mergers and acquisitions have already produced some strange bedfellows in the financial services field: a piano company (Baldwin-United) and a mortgage insurance firm (MGIC); a pen manufacturer (Parker) and a bank; a retail merchant (J. C. Penney) and a savings and loan (First Nationwide); and Sears Roebuck & Co. and a real estate company (Coldwell-Banker).
More plausible combinations include a discount broker (Schwab) with a bank (Bank of America); an insurance company (Prudential) with a stock broker (Bache); a money-market fund (Dreyfus) with a bank; and a credit card company (American Express) with a brokerage (Shearson). Look for more of these marriages this year.
Technology, especially the sale of personal computers, can be expected to stimulate the nascent market for home banking, according to Allen Lipis, president of Electronic Banking Inc. of Atlanta. The first commercial program, allowing customers to make transfers and electronically debit purchases, will be put into effect in Florida in April by Knight-Ridder. Expect more consolidation of automated teller machine networks, working eventually toward a nationwide system.
On the legislative front, 1983 is expected to be a year of oversight and discussion rather than major action. M. Danny Wall, staff director of the Senate Banking Committee, predicted that Congress would not repeal prohibitions against interstate banking until it becomes a reality in the marketplace.
Such a nationwide system is rapidly developing, thanks to technology making almost instantaneous transactions possible anywhere and the use of brokers to solicit funds.
Similarly, Wall foresees some changes in, rather than a repeal of, the law separating commercial from investment banking. Rhode Island Rep. Fernand St Germain, chairman of the House Banking Committee, plans exploratory hearings as well on expanding permissible activities of bank holding companies, streamlining the banking regulatory structure by combining agencies and creating a new insurance system that requires risky financial institutions to pay higher premiums.