Outlook for 2005

The general sentiment for 2005 is tenuous. Investors and analysts alike feel that the industry has peaked, and is getting ripe for problems resulting from rate hikes, insufficient loan growth and lurking asset quality problems.

I disagree with the general pessimism that is sweeping industry observers.

• Loan growth among SuperCommunity Banks will continue to be robust. While many larger banks are flush with deposits, SuperCommunity Banks are seeking additional funding sue to on-going double digit loan growth. Loan demand will continue to stabilize throughout the year despite a modest and gradual rise in rates
• Asset quality will remain strong among those banks that will resist the temptation to liberalize loan terms and increase loan size. Many banks that are not enjoying robust loan growth are looking for other ways to achieve it, including looser covenants and larger loans, as well as commercial real estate concentrations. Those chickens will come home to roost. There is no substitute for building small business relationships through small,. High yielding loans and the demand deposits that accompany them
• Acquisitions will slow down among the mega banks, but the second tier, especially $1-20 billion banks, will continue their quest to grow and aggregate. Lack of discipline in acquisition pricing will continue, especially in "hot" markets. The penalty for overpayment will be small, since larger banks that are already experiencing stunted organic growth will revert to acquisitions and cost cutting in 2005/2006
• Deposit growth will continue despite market attractiveness as rising rates bring back fixed income savers and others looking to park their money. Few banks will duplicate BankAtlantic and Commerce's tremendous organic growth performance as the Free Checking ride continues to decelerate. Only the best in execution will succeed in this game, as the demand for the toolbench and the coolers by true depositors wanes
• De novo branching as an alternative to acquisition will continue among SuperCommunity Banks, while the mega banks will rationalize their de novo growth plans, following the Chicago debacle, a failure by so many banks to enter the market in a big way
• Profitability will continue to be strong among the strategically focused and effective execution banks. Those who are looking for quick fixes will be burned in 2006/7. True breakthroughs will continue to shine, as well as slow growth and high profitability banks that maintain their discipline despite market Kamikazes
• The elusive cross sell will continue to elude the vast majority of banks, while a scant few will succeed in tying customers through in depth relationships. Many will discover that it is the single service households that wreak havoc in their bank-wide cross-sell results, as they comprise 50% or more of their customer base. Those that focus on such households will mine gold.
• There will be no relief from regulatory pressures, including the zero tolerance policy for Bank Secrecy Act violations. Continued regulatory vigilance means that banks will have to continue spending significant resources of compliance in 2005, including deep front line education. On the other hand, the second year of Sarbanes-Oxley 404 compliance should be less expensive.
• Revenues from payment services are at risk, following the faster-than-expected adoption of Check21 behavior, particularly by commercial customers. Simply calculating the impact of the change on a bank's payment-related income streams is often a revelation. Strategies designed to recover some of these lost revenues elsewhere, a-la TCF's pre-emptive strike with debit cards, need to be explored and put in place during 2005 to assure smooth earnings growth for many banks.
• Sales process installations will continue to fall short of expectations as banks look for the silver bullet and do not accept the complexity of factors impacting sales effectiveness. Incentives, career pathing, employee hiring and retention, recognition programs, promotions and advertising, feedback loops and several other elements need to all converge to support sales training and achieve true breakthrough results. Training alone, while critical, is not sufficient to get the job done.

Bottom line: next year is full of opportunities and froth with risks, as all new years are. The industry as a whole is well-positioned to continue its record breaking performance, despite many doubting Thomases among us. AS always, it will all come down to focus and execution.