Desert Sunrise

by Jack Milligan


The financial crisis occurred six years ago and yet we often talk about it as if it was just yesterday, which I think is an indication of just how profound that experience was for the banking industry. Of course, the legacy of the crisis lives on in the corpus of the Dodd-Frank Act and its progeny, including the Consumer Financial Protection Bureau; in the higher capital requirements that all banks must meet today under both Dodd-Frank and the Basel III agreement; and a much tougher supervisory environment. The crisis is long past, but the industry has been changed because it, perhaps permanently.

And yet the environment today is also different, and better, than it was a few years ago. That point was very apparent to me at Bank Director’s Acquire or Be Acquired Conference, which took place this week in Scottsdale, Arizona. Compared to, say, even three years ago I could feel a marked sense of optimism among the 800 or so attendees that life had returned to something that was at least predictable. I wouldn’t say back to normal because (forgive me for using an overworked phrase) there is now a new normal and it includes all of the aforementioned changes. The environment might not be all that most bankers would like it to be, but at least it has achieved a level of stability so they know what to expect. The industry’s margin pressure is still quite significant, and that has had a significant impact on revenue growth and profitability, but the U.S. economy continues on an upward slope even if it’s not quite as linear as everyone would like, so the business climate should keep getting better.  And while the industry’s regulatory burden has greatly increased as a result of Dodd-Frank and other regulatory initiatives, for the most part we now know what those changes are.

Knowing is always better than not knowing, even if what you do know doesn’t make you entirely happy. And most bankers have a pretty good sense of what to expect over the next couple of years.

I believe that an important outcome of this renewed sense of optimism will be a more vigorous merger and acquisition market in 2015. Not that last year was bad: There were 288 healthy bank acquisitions in 2014, according to SNL Financial, compared to 224 deals in 2013. But I think the combination of continued economic growth, generally favorable asset quality, a more positive regulatory view of acquisitions (as I explained in my January 27 post in this Spot) and continued margin pressure (which unfortunately does not look like it will change any time soon) will all be catalysts for a lot of M&A activity this year. Acquiring another bank is probably the best growth strategy that most institutions have today, and a stable environment gives them the confidence to take that risk.

If I came away from the Arizona desert with one lasting impression, it was that things that weren’t possible a few years ago are possible today. I love sunrises because I am a morning person, and one of the things I like about the morning is the feeling that anything is possible.

Maybe this is banking’s desert sunrise.