February 20, 2020 | Marcus Rothaar
When the Great Recession ended in June 2009, financial institutions and the consumers they serve were eager for brighter days, after living through a period of staggering unemployment, unprecedented decline in real estate values, record levels of foreclosures, and an implosion of automobile sales. While there have been 11 recessions since the end of World War II in 1945, none impacted the consumer or financial institutions as significantly as the 2007-08 financial crisis.
Fast forward ten years, and with each passing month the US economy adds to its run as the longest economic expansion in American history. But as the proverb goes, “all good things must come to an end.” With an eye toward the next recession destined to occur at some point, let’s take a look at what has and what hasn’t changed for the financial services industry in the last decade.
There were more than 16,000 banks and credit unions in existence when the recession ended in 2009. We’ve since seen a 34% decline in the number of institutions, with a bit more than 5,000 banks and 5,000 credit unions still around. The pace of consolidation accelerated in the last decade and exceeds the 21% decline the industry saw between 2000 and 2009.
A closer inspection of these consolidation trends reveals the smaller banks and credit unions bear the brunt of the lost institutions. At the end of the 2009 recession, there were 3,013 banks with less than $100 Million in assets. Today, only 1,207 banks remain in this <$100M asset tier. Similarly, there are only 3,770 credit unions remaining with assets below $100 Million, down from 6,457 a decade ago.
At the other end of the size spectrum, the 30 banks with at least $100 Billion in assets represent 67% of all bank assets. Back in 2009, the 19 banks in this upper tier accounted for 56% of all assets. For credit unions, the 322 credit unions with more than $1 Billion in assets represent 67% of the CU industry’s assets; compared to the 44% of assets represented by the 154 credit unions in this asset tier ten years ago.
Key Implication: Size matters. For very small banks and credit unions, the implication is even more stark: grow or die. While not every small institution is at risk of failure, it would be foolish to ignore the recent consolidation trends. These declines are at least in part due to it being increasingly more difficult for smaller institutions to make the capital investments needed to keep pace with consumer technology expectations. Smaller institutions do not benefit from the same economies of scale that their larger brethren do, which presents significant challenges in this era of low margins and declining non-interest income. All financial institutions would be wise to answer the four questions below in their strategic planning process, but these questions are even more paramount for small institutions.
It’s noteworthy that while the average ROA for banks and credit unions has improved over the last decade, a key driver of this earnings growth has been a reduction of provisioning for loan charge-offs. While both banks and credit unions have been able to dramatically improve their cost of funds due to the Federal Reserve’s monetary policy following the end of the recession in 2009, overall margins remain slim as strong loan demand for the low rates of the last decade limit financial institutions’ earning asset yields.
While banks’ and credit unions’ earnings have benefited from lower delinquency rates in recent years, it is not a sustainable means of continued earnings growth as delinquencies and charge-offs will eventually rise again. A key challenge for financial institutions heading into the next recession is finding ways to diversify earnings and being able to withstand at least some deterioration in the quality of the loan portfolio.
Arguably the most significant change in banking over the last 10 years has been the rapid adoption of mobile banking. When the recession ended in 2009, we were in the early adopter stage of mobile banking, with only 2% of all U.S. households using mobile banking, and another 3% “extremely interested” in the service, according to Raddon’s national consumer surveys at the time. A decade later, 59% of consumers use mobile banking, with one in four (24%) depositing checks via their mobile device too. As consumers further expand their usage of smartphones for everything from P2P services and mobile payments, financial institutions must continue to innovate their mobile offerings to keep pace with these enhanced consumer expectations. In 2009, the question financial institutions were asking was “do we need a mobile app?”. The question financial institutions should be asking today is more along the lines of, “Is our mobile experience up to par with that of our competitors?”. New account growth and retention is increasingly reliant on your honest answer to this question.
While industry consolidation, earnings trends, and mobile banking all paint a picture of a very different industry today compared to a decade ago, a few things remain unchanged. Dusting off a Raddon presentation given to financial institution executives in June 2009 reveals many similarities, including:
Each of these areas are just as relevant, if not more so, today as they were ten years ago. While some institutions have made great strides in using data to improve marketing capabilities, others are stuck in 2009 (or 1999). The strong economy of the last ten years has masked some of the urgency to address earnings diversification and improving marketing capabilities. But since nothing lasts forever, the importance of addressing these challenges grows as the clock ticks closer to recession. Is your financial institution prepared for the next recession, or are you at risk of becoming another consolidation statistic?
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