Bank Merger Wave On The Way
By Marilyn Bowden
Local bankers say they are concerned about inevitable changes in the interest rate and the implementation of new minimum capital levels. More merger and acquisition activity is expected in the near future.
"The biggest change is moving away from an artificially low interest rate environment to one of much greater rate volatility," said Carlos R. Fernandez-Guzman, president & CEO of Pacific National Bank. "That will catch a lot of community banks off guard. We smaller shops are limited in what we can do to offset those risks."
"Some have gotten comfortable with the current rates, and that could come back to bite them."
He said he would expect to see rates go down once more before they start climbing again.
"Realistically, from the fundamentals side, rates should be lower," Mr. Fernandez-Guzman said, "but we’re starting to see the market react. This is not good news, because most banks need a longer cycle to reposition."
As larger banks start dropping their rates for commercial loans still further, he said, some community banks are doing the same in order to remain competitive, "and that is not a good idea because we can’t hedge it as the largest banks can.
"And if rates start to climb quickly, they won’t even be able to service the debt. We do know that there’s a lot of variable rate debt out there, and a rapid rise would tip us into a situation as bad as or worse than the last time. So the Feds will have to be very judicious. But we don’t see a way to hold rates at this level much past 18 months — three years, max."
A rise in interest rates will also create pressure because people will start moving to alternative forms of investment, Mr. Fernandez-Gusman said, "so we are going to have to compete aggressively for funding. Reduced funding translates to reduced lending."
For community banks, said Hernando Novoa, vice president of the Consumer Banking Group at FirstBank Florida, a more competitive industry means going back to basics, "not just to sell a product but provide all the services the client needs. We are trying to think outside the box, looking for ways to improve client experience."
In addition, said Richard Dailey, president & CEO of Apollo Bank, "there’s pretty wide speculation that we will see a lot of merger and acquisition activity. Some have gone so far as to state that by the end of the decade the number of banks in Florida will drop from 230-plus to 100.
"That’s a bit steep, but I do think there will be fewer banks. But banking is still going to be banking. It is not a dying industry. There’s still a big demand for services and products that banks provide."
Another regulatory issue bankers have been talking about, Mr. Dailey said, is higher capital requirements set by the Basel Committee on Banking Supervision, which defines standards on capital adequacy. They will begin phasing in next year.
"What is appropriate for big banks is not always good for smaller banks," Mr. Dailey said, "though a lot of community banks already meet those standards."
With the new capital requirement, Mr. Fernandez-Guzman said, "banks are going to have to look at capital in a completely different way. We will have to assess capital levels almost on a quarterly basis to see if they are adequate.
"Banks will have to be much more proactive in finding capital, and that will mean consolidation in the industry because smaller banks are going to have to merge with other banks and achieve some synergy with respect to capital as well as operations."
FirstBank Florida, Mr. Novoa said, is responding by focusing on stronger relationship banking and automation.
"It’s a fast-paced world," he said, "and the new generation coming in is very tech-savvy. At the same time, we have to simplify automated banking."
Because many clients still prefer doing business in a bank branch rather than online, Mr. Novoa said, "we are trying to come up with new ideas for services that customers visiting branch locations can take advantage of. This is something banks in this state haven’t done historically."
Apollo’s business plan, Mr. Dailey said, involves focusing on locally-owned businesses in the tri-county area, primarily in Miami-Dade.
"As a business bank with consumer capabilities," he said, "we strive to get to know our clients’ businesses so we can be sure their loans and lines of credit are structured appropriately, and to provide the electronic banking services they need to be efficient."To read the entire issue of Miami Today online, subscribe to e-MIAMI TODAY, an exact digital replica of the printed edition.