It is possible President
Donald Trump will be able to use tariffs to jump start the reindustrialization of the United States. But it is also possible the escalation of costs on goods from China and other countries around the world will tip the economy into a recession.
Regardless of the ultimate outcome, the short-term impact on businesses is uncertainty.
In the latest Beige Book, the Federal Reserve’s periodic report on economic conditions, “uncertainty around international trade policy was pervasive across reports.”
“One banking contact noted that many clients had put major decisions on pause due to uncertainty about the state of the economy and another noted that capital expenditures had slowed,” the
Federal Reserve Bank of Chicago, which covers southeastern Wisconsin, noted in its report. “One contact in M&A said activity was at a ‘standstill.’”
The Chicago Fed said capital expenditures were down and expectations for spending over the rest of the year had also declined.
“Multiple contacts reported hesitancy to make capital purchases due to uncertainty over the economic outlook,” the Chicago Fed report said.
“Middle market companies started the year feeling very optimistic, anticipating deregulation and an uptick in deal activity, but recent uncertainty around policies have led many to take a more cautious, ‘wait-and-see’ approach,” said
Brian Grossman, managing director and head of Wisconsin middle market commercial banking for
JPMorgan Chase.
The good news is the impact of tariffs hasn’t quite started to show up in business financials.
“It has, without question, slowed down activity in the near term as people try to figure this out, but it hasn’t yet turned into any sort of credit deterioration,”
Bill Demchak, chairman and chief executive officer of Pittsburgh-based
PNC Financial Services, said on PNC’s earnings call.
“Broadly speaking, we’re not seeing anything, it’s way too early,”
John Stern, chief financial officer of Minneapolis-based
U.S. Bank, said on the bank’s earnings call. “The commentary changes frequently, so we’re all waiting and watching.”
“We try to communicate a lot with our clients and we’ve ramped that up over the last 60 days for sure, just trying to figure out what they’re thinking and where they might be impacted,”
Dave Seiler, president and chief operating officer of Madison-based
First Business Financial Services, said on a recent earnings call. “Right now, we’re not hearing a lot of noise from them. They have concerns and they have uncertainty, but I don’t believe they’ve been significantly impacted at this point.”
Building bank relationships
Where does all of that uncertainty leave banks and their clients? Just because businesses may not be looking to make big investments doesn’t mean there is nothing for companies to talk about with their banker.
“Unfortunately, sometimes business owners like to stick their head in the sand and say it’s going to get better, but good news and bad news needs to be communicated to your banker,” said
Michael Kellman, senior vice president of commercial and consumer banking at Brookfield-based
North Shore Bank. “The better the communication with the bank, the better the bank can help steer outcomes that are positive for the business owner.”
Grossman also highlighted the importance of talking with your banker “openly and regularly.”
“This is a best practice in all environments, but especially during periods of volatility,” Grossman said. “It’s always better to raise questions or concerns early – whether that’s a potential covenant violation, liquidity crunch, or something else. Be proactive so that you can collaborate and hopefully work out solutions in advance. You never want to be caught on the back foot.”
Kellman pointed to a number of areas where businesses and banks can focus, including reviewing working capital, assessing reserves, considering debt restructuring and looking at treasury operations.
“I would say in a time where they’re not looking to have major growth, that’s an important opportunity, a good time to strengthen their financial foundation and sometimes just the structure of their business,” Kellman said. “These are, I’d call them, high-value conversations that don’t require big-ticket investments or the need for big loans.”
Merchant services, speed of cash flow, reviewing credit cards for rewards and expense controls and an annual review of fraud protections are other areas Kellman suggested discussing.
“We’re not just a lender, we’re kind of a sounding board, a risk advisor,” Kellman said.
Bank relationships moving ‘at the speed of trust’
A key ingredient in banks being able to serve in a role that goes beyond lending is the relationship with the business leaders. In long-term relationships it is easier for information to move smoothly compared to newer relationships, especially those proceeded by a bad experience, which may face an uphill climb.
“The reality is relationships move at the speed of trust, so if that trust is in place, it can be and should be very transparent,” said
Gus Hernandez, senior vice president, director of business banking at Green Bay-based
Associated Bank. “It is up to the banker to build that trust; it is up to the customer to give it.”
Hernandez had a situation with a prospect earlier this year in which the potential customer, a product distributor, was considering taking on two new substantial lines of business that would require significantly more financing.
“They were sitting down with us because their existing bank, a very long-term relationship, said ‘no,’” he recounted. “No one ever wants to hear no, but they also don’t want to make a mistake, so when we sat down, we probably asked what seemed like an exhaustive amount of questions, but the purpose behind it was to truly try to, in a very abbreviated timeframe, try to get as much understanding about their business and that vision as possible.”
The prospect’s willingness to answer the questions and share information allowed Associated to put forward a particularly customized proposal and ultimately win new business.
“What’s interesting now is the inventory levels that they took on, they were really uncomfortable for that customer, it turns out to be genius because they had loaded up on all this inventory and now they’re selling it as pre-tariff,” Hernandez said.
As for how people are dealing with the current uncertainty, Hernandez said there is some anecdotal evidence of people being more cautious and some customers have chosen to scale back
investments.
Hernandez recounted another recent example in which a customer had received significant new orders and was considering buying several new pieces of equipment. After a number of conversations between the bank and customer about margins, the size of the order and the potential for future growth, Associated modeled out for the customer what things could look like.
If everything went to plan, it was a “slam dunk” to add three new pieces of equipment, Hernandez said. However, if only half of the new orders actually materialized, the picture was not nearly as rosy.
“The customer used that information to make what I thought was an excellent decision,” Hernandez said. “They said ‘know what, it might be too much to go three, we haven’t had this relationship extremely long term, we’re a little uncertain about the longevity of it, let’s pull back a little bit and let’s give this a good shot, but let’s not put too much at risk.”
