As banks emerge from a year of economic dislocation brought on by the pandemic, they have reason for optimism. A combination of low interest rates, fiscal stimulus and improving businesses conditions have put the economy on the verge of a robust expansion, and banking organizations are in a strong position to capitalize on that growth.
This usually isn’t the case for banks when they face a low interest rate environment like today’s and contend with concerns over credit quality coming out of a recession. Too often, these conditions lead to earnings challenges.
But this isn’t a typical recovery. These days, banks are sitting on record levels of liquidity, strong capital positions and the increasing prospect that credit losses will not be what most speculated. It all adds up to an opportunity for banking organizations to ride an economic wave to increased profitability, organizational expansion and technological innovation.
At the center of this growth is the imperative for many businesses to capitalize on the highly unusual current environment of real negative interest rates to take out financing that can fuel their growth, as RSM US Chief Economist Joseph Brusuelas writes.
As businesses look to banking organizations for these loans, the banks themselves can capitalize. RSM has identified three ways that banks can benefit:
Growing the loan portfolio
- Lean into the recovery: A combination of historically low interest rates and increasing demand from businesses coming out of the pandemic-depressed economy will create an opportunity for banking organizations to move away from stimulus lending and return to a more normal form of business lending. Adding loans to the balance sheet at rates above those imposed for stimulus lending and borrowers positioning their businesses to take advantage of an oncoming economic boom will lead to higher net interest margins while also improving the overall credit quality of the loan portfolio.
- Grow for the future:The pandemic brought mergers and acquisitions activity in banking to a near halt last year. There were only 112 deals announced, which is a 60% decrease from the 259 deals announced in 2019—the lowest level in more than 30 years. But as banking organizations move into the next growth cycle, the excess liquidity they sit on provides a catalyst to grow, gain efficiency and add scale in a way that this generation of bankers have most likely never seen.
- Unlock growth:The banking industry was innovating well before the onset of the global pandemic, and the pace of that innovation has only accelerated. Banking organizations need to increase the allocation of financial resources—by tapping into their excess liquidity—to invest in long-term technological innovation. At the core of these investments is a more effective use of data to make more informed business and borrowing decisions. There is also the need to build a more efficient back office through automation and continue improving communication and engagement with borrowers and customers as nontraditional players look to continue dislocating the industry.
Planning begins now
If banking organizations are to purposefully grow their loan portfolios and make strategic investment decisions, they need to begin planning now.
There is no doubt that these organizations still need to remain focused on ensuring that the negative impact from the economic downturn doesn’t become a long-term drag. Yet executives and boards need to start the discussion on how to capitalize on the upward momentum in the economy. A failure to do so will lead to missed opportunities and depressed financial results.