The 2018 Raddon Crystal Ball
2017 proved to be a good year for the U.S. from an economic perspective and for the financial industry as well, with new record highs achieved in the stock market, much stronger GDP growth - especially in the second and third quarters, and continued improvement in real estate sales and values. The industry showed continued improvement in earnings and also continued strong loan growth. There were also a few concerns that emerged that may prove to be harbingers of the future. One is the decline in new auto sales in 2017. Another is three rate increases by the Federal Reserve – a trend which is likely to continue. From an industry perspective, a concern should be the lack of significant improvement in margins in the face of these three rate increases.
In our predictions article published in January of 2017 we were remarkably prescient in identifying these trends. So what are our prognostications for 2018? As you review these eight predictions for 2018, think about the impact each of these is likely to have on your institution.
Prediction: GDP will continue to grow strongly in 2018
Growth accelerated in the second and third quarters of 2017 and this trend should continue into 2018, although there will be growing concerns. One concern in the economic impact of continued Federal Reserve rate increases. The second is continued softness in automobile sales (see below). Also, approximately midway through 2018 this recovery will officially become the second longest recovery on record, and every recovery does ultimately end. However, count as a tailwind the recently-passed tax cuts. The reduction in corporate tax rates has already contributed to the highest level of small business optimism ever recorded, and that tends to bode well for the economy. All in all, we expect the economy to grow at just less than 3% in 2018. However, we could see some softness creep in late in 2018.
Prediction: Auto sales will decline further in 2018
In 2017 new auto sales declined by approximately 1.5%, following seven consecutive annual increases since 2009. Prior to this, the longest uninterrupted run of annual increases in auto sales was a five year period from 1996 to 2000. The decline in auto sales will continue in 2018, as we anticipate auto sales to decline by another 2% in 2018. The reasons for this are both cyclical and long-term in nature. The cyclical aspect is the normal credit cycle. The long-term is the fundamental change in driving patterns that we are beginning to see emerge; the impact of things such as Uber / Lyft, autonomous driving vehicles, etc. If you serve urban or densely populated markets you are likely to experience this sooner. The implication for the industry is significant. Much of the growth of consumer lending for both banks and credit unions over the last several years has come through the indirect channel. With declining sales volume, we are likely to experience lower margins, higher dealer concessions, and lower credit quality – leading to higher chargeoffs – in the indirect arena.
Prediction: Three rate increases by the Fed
Following the three rate increases the Fed pushed through in 2017, expect an additional three in 2018. There appears to clearly be a bias toward higher rates at the Federal Reserve. Two factors could lessen this likelihood. The first is a flattening of the yield curve. As short term rates rise, if long term rates do not rise commensurately then the yield curve flattens, and flat or inverted yield curves tend to lead to recessions, so the Fed tends to try to avoid flat or inverted yield curves. The second is first-time claims for unemployment. If this number begins to creep up then the Fed may slow the pace of rate increases.
Prediction: Real estate values will continue to appreciate but at lesser levels than in 2017
While real estate appreciated by approximately seven percent nationally in 2017, this will ratchet back to an estimated four to five percent in 2018. Continued upward pressure on entry-level home prices will be offset by softness in higher-end homes. This is a result of the significant demographic shifts that are already underway. As Baby-Boomers look to downsize from their generally larger homes, there are not enough Gen Xers to buy these homes. There will continue to be a shortage of entry-level homes.
Prediction: CD portfolios will grow at an accelerated pace
CD portfolios exhibited growth at the majority of financial institutions in 2017. We anticipate this growth will accelerate in 2018. Loan demand has improved in 2017, and this in turn has impacted the hunger for deposits at many financial institutions. This is particularly true for institutions that have been heavily engaged in indirect lending. Coupled with this accelerated growth we will begin to see more innovation in deposit product design – new product twists designed to attract the eye of depositors. Don’t neglect the role of your staff in deposit growth, however. If you are a typical financial institution, very few of your front-line staff have ever even sold deposit accounts competitively, let alone sold them in a rising interest rate environment.
Prediction: Mobile banking usage will surpass 60% of households
Online banking continues to be the dominant delivery channel used by consumers on a monthly basis, followed by the branch. Currently 57% of consumer households use mobile banking monthly. We expect this to exceed 60% in 2018. Mobile banking will continue to be particularly important to younger generations – 85% of Millennials use mobile banking monthly. More importantly, an increasing number of consumers will be mobile-centric financial consumers, most particularly Millennials and especially the up-and-coming Gen Zers.
Prediction: Branches will contract by 1% in 2018 but branch usage will remain steady among U.S. consumers
Bank and credit union branch growth outstripped population growth every year for the last 60 years – until 2010. Since 2012 we have seen an approximate seven percent decline in financial institution branches. In that period the big banks have been more aggressive in closing branches, with Citibank, Bank of America and PNC leading the way in closing domestic locations. But this reduction is simply an adjustment for massive branch overbuilding that occurred between 2003 and 2008. In the long term branches remain critical to the delivery infrastructure; however, branches will continue to evolve in role and function. Your branch design and staffing plans need to evolve accordingly.
Prediction: Home equity lending opportunities will still exist
Even with the changes in the tax code and the elimination of the tax advantage of equity lines and loans, we anticipate that this category of lending still remains viable. First, existing lines and loans will be more difficult to refinance into the first with the rise in interest rates. Second, equity lending may still offer a better rate for consumer borrowing needs than other lending vehicles due to the secured nature of the loan. This product does not go away but it does have to evolve.
These are our key predictions for 2018. Let’s see how these pan out.