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December 24, 2007

Banking & Finance: Banks Await Subprime Shakedown

 

 

Local financial institutions face challenge of attracting and retaining customers

By Taryn Plumb
Special to the Worcester Business Journal                                                                                                                   

Banks, perhaps more so than other sectors, are a barometer of the economy's strength. When times are good and people feel financially stable, they invest more. In the converse situation, whether because of anxiety or strapped finances, they don't.

Nationally, banks have felt the effects of such purse tightening - third quarter results showed a near 25 percent tumble in earnings, according to the Federal Deposit Insurance Corp.

Waiting For The Pendulum To Swing


Thus, in the coming year, the challenge for the area's banks will be to attract hesitant customers in an increasingly competitive market - and at the same time deal with inflating energy costs, declining real estate prices and the financial contagion of the subprime mortgage meltdown.

K. Michael Robbins, president and CEO of Spencer Savings Bank.
The latter may have affected financial institutions the most. Some have clamped down on lending to follow the lead of mortgage companies while others have seen an increase in mortgages.

Bank presidents assert that the subprime debacle still has to right itself, and will continue to affect business - and the economy - through 2008.
"Anytime the pendulum swings too far to one side, it has to swing to the other side," said John Merrill, regional president of Sovereign Bank.

"The overall economy is a big question mark right now."

Merrill predicted a continued increase in foreclosures next year, as well as many more homes sitting stagnant on the market. He also predicted a ripple effect of severe slowdowns in commercial development.

How 2008 ultimately plays out, however, will be largely up to consumers. Spending, if it remains strong, will help prop up the economy, said Merrill. "Everyone's keeping their eye on consumers," he noted.

What might also help mitigate things are a strong U.S. export business - the fortunate result of the unfortunately weak dollar - and the continued downturn in short-term interest rates as the inverted yield curve rights itself, noted many local bank presidents. (In a normal yield curve, short-term bonds pay less than long-term bonds, but when it's flat, they're about the same, allowing for better income for banks.) Interest on long-term investments and loans will also remain at historical lows, which could also level things out, said officials.

But again, everything is up to the consumer - and the economy.

"Because if people can't afford it, it doesn't matter what the rates are," said K. Michael Robbins, president and CEO of Spencer Savings Bank.
Even so, some in the industry remain guardedly optimistic. Brian Thompson, president and CEO of Commerce Bank & Trust Co. in Worcester, compared real estate to a business of cycles, and said that, like any road, it gets rocky.

"The cycle will change," he said. "We'll go through this bubble."

Another worry for banks - and nearly every other sector - is rising energy costs.

Paul Scully, president and CEO of Country Bank for Savings in Ware, noted that, thus far, increasing energy prices have had "very little ripple effect" on the economy. But in 2008, he said, he believes that will change, with those costs decreasing disposable income, thus affecting the number of people who borrow and spend.

The Internet Calls


Facing this battlefield of challenges in 2008, bank officials say they recognize that they have to ratchet up the competition. One way to do that is online.

The newest development in banking is what is known as remote deposit capture. With the service, businesses make use of check scanners and e-mail to make deposits. Although it's a relatively new concept, it allows banks to be competitive because they can inexpensively broaden their services. "We can expand our territory without having to put up branches," noted Robbins.

Similarly, there is an "untapped market" of small businesses that don't yet use online banking, Merrill said, so in 2008 many banks will likely aggressively market to them.

But despite technological advances, presidents don't fear branch closures in the coming years. They say customers of all types still like to know that the bank is there, especially if they have concerns, encounter problems or want to explore long-term investing. "No matter how much we invest in technology, I don't think it'll ever replace the bricks and mortar of our business," noted Merrill.  

Convenience and access are other key competitive fronts in the industry. Because it's such a crowded market - there are more than 240 banks in Massachusetts, not counting credit unions - financial institutions will continue to operate from the mindset that they can't just be ordinary.

In 2008, that will manifest in ongoing pushes for near-24-hour service, either through expanded web services or extended hours. Institutions will also continue to explore partnerships with retail chains.

Sovereign, for example, has a Marlborough branch co-hosted with Dunkin' Donuts, and ATMs in all CVS pharmacies in its footprint.

All those pressures combined mean bankers have to think on their feet in '08 in order to stay competitive.

"You have to be equal, or better," explained Thompson. "No one's going to bank with you just because you're in Worcester."      

Taryn Plumb is a freelance writer based in Worcester.

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