Banks Prepare for 2010

Grant Thornton LLP recently completed the first quarter installment of its 17th Bank Executive Survey. This annual national research program, undertaken in association with Bank Director magazine, measures trends and opinions from bank chief executive officers and chief financial officers on challenges and strategic issues for the year ahead. The following are highlights from the first quarter 2010 survey.

1. In what part of your lending portfolio do you expect the most losses in the next 12 months?

Commercial real estate 55%

Commercial 17%

Single/multifamily 12%

Construction 8%

Consumer 5%

Other 3%

The recent deep economic downturn has had a pronounced impact on all lending sectors, but the return of credit availability will determine how soon commercial markets recover, most economists agree. Not surprisingly, commercial real estate is the sector where banks are anticipating the most losses in 2010.

2. Over the next 12 months, will your board increase its focus on risk management?

Yes 52%

No 48%

In general, corporate boards are recognizing the need to step up risk management across the banking organization and understand that directors must ensure the proper balance between risk and reward. More than half of the bank executives surveyed agree their board will be increasing focus on this crucial responsibility in 2010.

3. Do you agree or disagree with the following statements?

The government should play a role in setting compensation parameters and guidelines.

96% disagree

The requirement to evaluate executive compensation will reduce excessive risk taking.

57% disagree

Executive pay should be based upon bank performance.

84% agree

No surprises here-despite massive consumer and political outcry for legislation and regulation on financial executive compensation, bank executives firmly believe compensation practices should not be mandated by law and most agree pay should be tied to bank performance metrics. In lieu of mandated pay guidelines, it will be interesting to see how many institutions voluntarily adopt say on pay proposals in the coming year.

4. Do you plan to grow the bank in the next 12 months?

Yes 26%

No 74%

If so, how do you plan to achieve growth?

Increase in-market deposit share 76%

Acquire or build branches 26%

Acquire an institution 26%

Offer additional products 25%

Offer additional services 19%

In the face of a continuing lackluster economy, most banks surveyed aren’t planning on a positive growth line in 2010, but for those who are, increasing local deposits is the method the majority plans to use. In addition, about half of those are looking for growth plan to either acquire institutions or additional branches in 2010.

5. How will you primarily manage capital in the next 12 months?

Shrink the balance sheet 21%

Reduce overhead 13%

Private offering 12%

Reduce dividends 5%

Public offering 4%

Other 15%

None of the above 30%

Following the lead of many of the world’s largest financial institutions this year to dispose of unnecessary assets, many banks are looking to shrink the balance sheet where possible as a primary means of managing capital.

6. Are you interested in bidding on a failed bank?

Yes 41%

No 59%

By year end, the FDIC had closed operations of 135 banks, representing the largest number of collapses since 1992, when 181 lenders were shuttered near the end of the savings-and-loan crisis. However, when one door closes, another opens, as healthy institutions are now given the opportunity to bid on failed assets held in receivership by the FDIC. Forty-one percent of banks surveyed noted possible interest in bidding on a failed institution in the coming year.