Financial institutions will continue to improve from a profitability standpoint throughout 2013. However, earnings pressures will also continue to challenge the industry.
Through the third quarter of 2012, Wisconsin’s state-chartered financial institutions continued to show improvement in several key measurements signaling continued strength in the industry. More than 92 percent of Wisconsin’s financial institutions were profitable through the third quarter with more than two-thirds showing earnings gains over the prior year.
These improvements in the industry coupled with the decrease in consumer debt are evidence that the economy in Wisconsin continues to stabilize.
Nationally, there continues to be improvement in the industry with more than half of all financial institutions (57.5 percent) reporting higher quarterly net income in the third quarter compared to a year ago. This quarter was the 13th consecutive quarter that earnings have registered a year-over-year increase. Also noteworthy was a decline in the number of banks on the FDIC’s “problem list” from 732 to 694.
This is the sixth consecutive quarter that the number of “problem” banks has fallen and the first time in three years that there have been fewer than 700 banks on the list.
A diverse, healthy banking industry is critical to the overall success of Wisconsin’s economy and the growth of our local communities.
Financial institutions play a big part in helping individuals grow and prosper and small businesses get started and expand. Financial institutions also contribute thousands of dollars to local civic, charitable and other groups, and bankers donate countless hours of time to volunteer in their communities.
Even with these positive trend lines both nationally and at the state level, the financial institution industry is facing steady headwinds. Regulatory burdens continue to grow unabated and the expenses are disproportionately affecting community banks. There are seven pending federal rules alone affecting the mortgage lending business that are expected to be finalized and effective in 2013. This is in addition to other regulatory changes affecting the overall compliance burden of financial institutions. These compliance burdens add nothing other than bottom line expenses to the overall balance sheet of financial institutions while providing limited real value to consumers. New capital rules proposed as part of the BASEL international accord (referred to as BASEL III) will also place great burden on community banks if they are finalized as drafted. The BASEL III rules were thought to be primarily aimed at those financial institutions with international, complex operations.
Instead, the rules affect every single financial institution including the smallest community bank. Financial institutions have always had to follow capital rules, setting money aside for periods of negative earnings.
However, there is no explicit justification provided in the BASEL III rules to support higher capital standards on community banks that, by themselves, pose little risk to the overall economy. Yet the potential negative impact of these rules on community banks is significant.
Rising expenses coupled with earnings pressure and capital challenges are expected to result in more consolidation in the industry. This trend is starting to occur again in Wisconsin with six acquisitions announced in 2012 alone. It is likely that we will see at least the same number announced in 2013. While consolidation in the industry has always occurred, it did so at a much slower pace over the last decade than what is expected to occur over the next several years.
All of these divergent forces support the forecast of continued strength in the financial institution industry yet a continuing decline in the overall number of Wisconsin banks.
Rose Oswald Poels is president and CEO of the Wisconsin Bankers Association. Founded in 1892, the organization is the state’s largest financial industry trade association, representing over 270 commercial banks and savings institutions and their nearly 2,300 branch offices and almost 24,000 employees. Of the 270 Wisconsin banks, 97 percent are members of the Wisconsin Bankers Association. The Association represents banks of all sizes, from banks in rural Wisconsin to the state’s largest financial institutions.
