With healthy balance sheets and a backlog of investments to make, businesses could be in the market for more loans next year.
Even as the omicron variant adds another layer to the challenges presented by the pandemic, some banks head into 2022 with reasons for optimism.
While the economy in recent months has faced inflation, supply chain issues and the possibility of rate hikes sooner and more often than expected, bankers see positive trends in the local market.
“It’s going to be a transition year, hopefully,” said Lisa Murray, Citizens Bank’s Massachusetts market president. “I don’t think, even if COVID sticks around, that it will have the detrimental effect that it had in 2021 and certainly 2020.”
Consumers, Businesses Financial Healthy
While some households and businesses continue to struggle from the effects of the pandemic, the federal government’s economic aid and stimulus payments have helped reduce poverty and kept businesses afloat.
In many cases, the results of these policy actions have households increase their net worth and decrease the size of debt payments to all-time levels, while also driving corporate earnings, said Daniel Curtin, head of J.P. Morgan Private Bank in New England,
“Consumers and businesses are actually quite healthy,” Curtin said. “There was an aggressive policy response, and the result was both households and corporate balance sheets are really strong.”
This financial strength will be a key issue driving markets in 2022, Curtin said, leading the bank to enter the new year with a positive outlook.
Innovation will also drive markets, Curtin said, with Greater Boston in particular seeing the potential for growth in health care and technology. He added that technologies that help mitigate climate change could also drive the local market as companies work on developing sustainable solutions.
The markets do face risk, Curtin said, including from inflation. Issues with limited supplies amid a strong demand for goods has contributed to inflation, he said, adding that J.P. Morgan sees high inflation lasting for a few more months before the inflation relating to the demand for goods cools off, leading overall inflation to moderate.
COVID remains a risk as well, Curtin said, but he noted that the delta variant, which started to affect the country about six months ago, did little to hurt the U.S. stock market.
“We think the economy is going to come through this pandemic era stronger than it was before,” said Daniel Curtin, head of J.P. Morgan Private Bank in New England.
While COVID still has some impact on employment, Curtin said, the abundance of jobs and increasing wages also contribute to the positive outlook. Even with businesses having to pay higher wages to employees, the effects are balanced by the increased ability of these workers to participate in the economic cycle, a positive for the economy and for corporate America, Curtin said.
Business Borrowers Hesitant to Invest
Citizens Bank is “fairly bullish” looking ahead to 2022 and expects banking to be strong, said Murray said. She does expect banks to see an inflection point, though, as businesses that have been flush with cash start investing the money, leading to a decrease in deposits before the use of lending products starts to increase again.
Technology investments could become a major focus for business’ investment next year as hiring challenges continue, she said, allowing them to streamline their operations to offset current difficulties in finding staff.
Murray, who leads Citizens’ nonprofit and professional services lending and became market president this year, said her team has been talking with clients for years about the need to invest in technology.
“They’ve been hesitant because it’s a process when you implement new technology,” Murray said. “Since the pandemic they’re so short-staffed [and] fraud is through the roof, they’re saying ‘I’m going to make this a priority now because we can’t keep delaying the investment.’”
With the drivers of that hesitation getting laid to one side, demand for new investments should take off, she said.
“I think it’s going to be a slow recovery, unless of course we can get these issues behind us quickly,” Murray said. “But I do think once people are feeling more confident, there’s so much demand – so much investment that was put on the back burner – that we should start to see a lot of activity.”
Interest Rate Increases Could Drive M&A
Murray will be watching COVID, supply chain issues and other factors to see if they work themselves out, reducing the need for as many rate hikes as the Federal Reserve is forecasting for the next three years.
Other community banks are watching, as well.
“We’re kind of holding our breath a little bit,” said Peter Brown, president and CEO of Dedham Savings Bank, about the possibility of rate hikes in 2022.
The effects of higher interest rates, including the affordability of homes, affect banks like Dedham Savings and other community banks with business tied to real estate. Higher rates could keep borrowers on the sidelines as houses become less affordable, Brown said. But if fewer people are looking to buy, he added, higher rates could ease the inventory crisis, opening up opportunities for homebuyers and businesses already sitting on the sidelines to buy a house or move into new office space.
Another concern for some community banks is more margin compression. While community banks have some income from fees and make money from selling mortgages on the secondary market, Brown said, their earnings often depend more on the margin spread – the difference between the interest rates banks pay on deposits and the rates earned on loans.
Diane McLaughlin
Some community banks could see rates increase on deposits more quickly than on loans, Brown said, adding to compression.
“With the rise in interest rates, that’s where you’ll see some margin compression that will hurt a lot of community banks,” Brown said. “At some point asset repricing will catch up with that and all will be good again, but how much pain can we take while the deposits reprice faster than the assets reprice?”
If compression does happen, smaller banks could look for merger opportunities, he said.
However, Massachusetts banks do have strong assets and earnings right now, said Brown, who also is on the board for the Depositors Insurance Fund, which provides excess insurance for deposits above the amount insured by the Federal Depositors Insurance Corp.
“So hopefully that won’t create any pain for us if real estate values either level off or decline, or the general business environment stalls a little bit,” Brown said.
