General Market Information

What Is Ahead?

Posted on November 13, 2019 Published by

2020 Financial Atmosphere

I’m not sure about you, but if things are going well, I can get a bit complacent. I tend to forget that gravity does still exist (except when I see my waistline) and markets do cycle. We’ve seen a couple of years of positive economic trends. Things like low unemployment, good wage growth, improved tax structure, low interest rates, and good corporate earnings. So it would be easy (and tempting) to just extrapolate that growth and profit line up and to the right. In the credit markets we have seen the benefit of the rising tide raising (all?) boats. But if history has taught us anything, it is the tide eventually goes out and the losses that were hiding are now in plain sight. Let’s take a look at how 2020’s financial predictions are going to effect your 2020 Plan Development.

Consider Future Risks

There is no question that it is instructive and necessary to consider the macro economic environment that we are currently in and consider future risks as we enter 2020. While not a unanimous consensus, most economic pundits do not see a recession materializing in the coming year. A healthy labor market and fresh stimulus from the Federal Reserve are key pillars of support. Trade uncertainties, a slump in manufacturing, and the global slowdown continue to headline the list of risks to this bull market.

Certainly, it is unwise to dismiss these concerns. But these issues are not an inevitable trigger for recession. Rather, the economy’s dependence on the consumer will allow it to avoid recession despite the challenges.

In Edward Jones’ “Fourth Quarter Outlook,” their position is that the headwinds from trade or the collateral damage from tariff uncertainty on manufacturing will not end the economic expansion. Total U.S exports represent less than 13% of the U.S GDP. U.S.-China trade is equivalent to less than 1% of global GDP. 70% of GDP comes from household spending so growth should be sustained in the year ahead, although at a lower rate in the 1.5% to 2.0% range.

2020 Plan Development

As we look forward into our cloudy crystal ball for 2020 to develop our business plan for the year, we challenge ourselves with goals for the year. As we reviewed in our December 2018 blog, the analysis for financial institutions typically comes down to a balance of Volume, Price and Quality (VPQ).

This is admittedly a bit of an over-simplification. But it does beg the question, “Where do I start?” Unfortunately, many times this equation is driven as much by either wishful thinking, the extrapolation mentioned above, or the infamous “dart board.”

Local Market Economy Outlook

Not unlike the general macro outlook for the economy, a macro look at the local market is constructive. What were the major growth industries in your market? Was it construction, manufacturing, agriculture, real estate, etc.? What financing needs did these industries have? Are the needs primarily for working capital, equipment, or real estate? Is the growth likely to be sustainable? Is there an outside event such as regulatory changes that are driving the growth?

Depending on the answers to these questions, it would be advisable to constructively challenge your institution’s ability to respond to these needs. This would include a review of existing credit policy and procedures and/or bank internal systems and processes. If your institution took advantage of the growth in your local market, it would be wise to consider “Did we eat too much?”. Now we have a potential concentration issue. When the tide goes out, you don’t want all your boats sitting on the mud flats.

In addition to growth industries, which industries did not perform as well? From a quality perspective, is it time to do some pruning of lower performing clients and/or those with less future upside? When the market is hot and there is more money chasing fewer deals, it is an opportune time to move the marginal performers to a new home. Obviously, the catch is that you don’t fall for someone else’s discard.

My experience is that many institutions miss the most valuable resource at their disposal: their customers and clients. Year-end should be a time of concentrated calling on your existing clients. Armed with up-to-date financial information, it is a time when you may be discussing potential year-end adjustments for tax planning.

Unfortunately, I have been (unpleasantly) surprised by adjustments that borrowers make for any number of reasons (inventory adjustments, uncollectible accounts, etc.) and financial performance is well off prior expectation. Ideally these meetings can be held with the company’s CPA, another trusted advisor, and potential source of new business. It is a great opportunity to not only review past financial performance, but to obtain invaluable market intelligence.

Both your client and the CPA, if present, can offer insights into what they hear and see in the market generally in addition to specific events and conditions that contributed to their success, challenges, and surprises. What are specific business issues and challenges that keep them awake at night?

The beauty of these conversations is many fold. You can glean information about specific businesses and industries that will make you a more valuable resource to your other clients. You can also be persuasive in your conversations with prospects. And establish a stronger relationship and bond with your client.

When the market intelligence is shared between market and credit partners, you can establish a team better prepared to meet the needs of a diverse and changing marketplace. With a bit of luck, miss the potholes before they become craters.

Kind of makes some of the issues of V, P and Q more manageable.

 

Richard Rudolph is Senior Consultant at Enlighten Financial, a specialized consulting firm. They focus on loan review and risk management services to community banks and credit unions. Enlighten Financial has made it our business to shed light on the complex financial landscape. We lead clients in the right direction. We work with financial institutions and other providers to mitigate risk. To talk to Rick directly, please call: 920.445.8133

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“The staff at Enlighten have been available for questions, in addition to the engaged work that they do. They've been very helpful as a resource beyond the major audit.”
— Meghann Kasper, Chief Credit Officer, Bank First
“Enlighten gives us a very good second set of eyes on our transactions. They're not afraid to challenge us on some of the work that we've done, which is what is needed. I don't need to pay somebody to tell me I'm good, I need to pay somebody to tell me where I've made mistakes.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
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— Bill Beardsley, President, Michigan Business Connection
“By questioning some of our methodologies, Enlighten has helped us say, ‘Okay, this is where we need to train staff better and focus on so that they understand what they're doing better.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“The organization of the communication — before, during, and after the reporting process — was certainly better with Enlighten than what I've experienced with a lot of auditors.”
— Bill Beardsley, President, Michigan Business Connection
“The staff at Enlighten have been available for questions, in addition to the engaged work that they do. They've been very helpful as a resource beyond the major audit.”
— Meghann Kasper, Chief Credit Officer, Bank First
“Enlighten gives us a very good second set of eyes on our transactions. They're not afraid to challenge us on some of the work that we've done, which is what is needed. I don't need to pay somebody to tell me I'm good, I need to pay somebody to tell me where I've made mistakes.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“Enlighten provided industry best practices that weren’t going to show up in an audit report. They would say, ‘Hey, I noticed you do this. This is really unique, you do a really great job of it.’ And then they might add, ‘Some other clients that I have are doing something like this.’”
— Bill Beardsley, President, Michigan Business Connection
“By questioning some of our methodologies, Enlighten has helped us say, ‘Okay, this is where we need to train staff better and focus on so that they understand what they're doing better.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“The organization of the communication — before, during, and after the reporting process — was certainly better with Enlighten than what I've experienced with a lot of auditors."
— Bill Beardsley, President, Michigan Business Connection