By Christophe Delporte
Wthat one year can make a difference. We are still battling a global pandemic, but according to the Conference of State Bank Supervisors, eighth annual national survey of community banks, bankers’ concerns have changed since last year’s survey. In 2020, local business conditions were a priority for community bankers. This year, the lingering effect of COVID-19 on local economies has created a new concern: historic levels of deposits and narrow net interest margins. As the pandemic continues, banks are reporting significant liquidity. On the other hand, however, 52% of community banks described loan demand as a “very big” challenge with declining lending, especially in commercial, agricultural and commercial real estate categories.
“Bankers were suspicious of declining net interest margins, which they listed as one of the main external challenges in this year’s survey,” wrote the survey’s authors, who interviewed 470 banks with less than $ 10 billion in assets. “They looked for new sources of non-interest income, cut expenses, and looked for ways to cut costs and make better use of bloated deposits. One banker summed up the problem as “flush with cash and no loan application.”
The paycheck protection program initially inflated bank balance sheets, adding about $ 145 billion in loans by the end of 2020, according to the survey. The volume of PPP loans fell to $ 111 billion in June of this year. Lending outside of the PPP, particularly in the commercial and industrial sector, was “less robust,” the report’s authors noted. Non-PPP commercial and industrial loans declined $ 30 billion, or 10%, from December 2019 to June 2021.
“This probably reflects a corporate borrower preference for PPP,” the survey authors wrote. “But it can also reflect the preferences of bankers. When it comes to expanding traditional lending to this sector, where banks have to assume the risk of non-payment, many bankers have said they have “lost their appetites”.
The pandemic has also created positive long-term effects. More than 40 percent of community bankers said this had led to increased efficiency, and more than 70 percent of those surveyed said prospects for long-term loans were improved by new or closer customer relationships.
“The reputation of community banks will be enhanced because of their commitment to serving customers throughout the pandemic by staying open, taking aggressive measures to protect staff and customers, and providing loans,” one respondent said. to the inquiry. “However, the way the industry works can be permanently changed as we have discovered how to do non-client work from home, as well as non-transactional work done more electronically through email, online and on-site. other means. “
Other important findings from this year’s survey include:
- Concerns about cybersecurity are on the rise, with 81% of respondents rating it as a very significant risk, more than double the rate of any other type of operational risk noted in the survey. This is up from 60 percent last year. Banking secrecy law is a growing concern for community bankers, according to the survey. In total, 26% called it “very important”, up from 20% last year. Almost 29% of bankers said they had been contacted by law enforcement about suspicious activity.
- The COVID-19 pandemic has changed the nature of technological change. The cost of technology has gone from being one of the least important issues two years ago to one of the most important, with almost 47% of bankers calling it a “very important” challenge. The pandemic has strongly prompted banks to adopt new technologies that meet the needs of their customers. About a third of those surveyed have increased their online services by more than 50%. More than 34% said the adoption of new technologies was “very important”, up from 23% last year and 8% the year before.
- Concerns about the cost of funds are rising, described as a “very significant” risk by 22% of those surveyed compared to a year ago when, according to CSBC, “it was hardly seen as a challenge.” Greater concerns about the cost of funds are less evident in an era of record interest rates, according to the survey. This may reflect, as one banker put it, an ongoing effort “to seek out low-cost deposits in order to obtain [the]cost of funds as low as possible. It may also reflect concerns about potential competitive vulnerabilities, according to the survey, which bankers identified as their biggest obstacle to attracting and maintaining core deposits. “We will continue to pay the lowest rates until competitors are forced to raise rates,” said one banker.
- Regulatory risk is an ongoing challenge, with almost 50% rating it as “very important”. About 25% of bankers rated consumer compliance and compliance in general as “very important”. Both ranked higher than last year. Although the overall costs of compliance have declined, the survey indicated that respondents continued to report being “crushed” by “choking” and increasing regulations. The authors of the survey, however, noted a change in attitude. Almost all of the bankers said regulatory guidance on loan modifications was important, at least to some extent, in helping their banks respond to the pandemic. A majority cited similar benefits for reduced focus on review activities and more flexible supervision.