Banks, Cyber and Black Eyed Peas

As we head into New Year’s weekend, I find myself reading a lot of year in review and next year outlook material. I am a big fan of the overviews and outlooks but try to avoid those prognosticators making specific predictions they insist are actionable right now for the low, low cost of your retirement accounts. I find that by reading a bunch of the overviews, I can begin to develop a picture of potential developments and obstacles an industry or market my face in the New Year. I won’t act on them today but being aware of what might happen allows me to have a game plan ready if the events do unfold in the manner.

I probably spend more time on banking and real estate outlooks than anything else since that is where I focus much of my attention. Of course, I also believe that if you understand what is going on in the banking sector and real estate markets of a given city, town, nation or continent you know everything you need to know about the economy of that locale.

Deloitte, the global audit, consulting, financial advisory, risk management, and tax consulting firm released their Banking and Securities Outlook 2017 this month, and there are some key takeaways for us as investors. The company thinks that post-election may have brightened the outlook for banks and securities firms, but challenges still exist. Banks will face significant technology challenges in 2017 and will probably have to spend some money to build and protect a new model of banking in a Fintech world.

Deloitte is equally confidently caution about the overall economy saying “US gross domestic product (GDP) growth should be higher than in 2016, reflecting a tighter labor market. However, this almost-full employment is far from ideal; a serious skill divide exists alongside too many temporary and underemployed workers. The resulting low productivity growth could lead to a plateau as the year progresses.” I have been saying this for some time as the job creation I see outside the beltways and rivers is not of the kind we need to achieve higher growth rates and I still talk to a lot of people who are incredibly frustrated with their inability to find a meaningful and rewarding job. Better, not good. Perhaps now that a firm as renowned as Deloitte agrees with me, I will finally get the recognition as a brilliant economist that I clearly deserve!

The company also addresses one of my favorite topics, Bank M&A. The report notes that “M&A activity may slow considerably until greater clarity about the coming regulatory landscape emerges, possibly prompting a fundamental rethink of business strategy. Even so, large national banks will likely continue strategic divestitures to hone their business footprint, shedding ancillary businesses that aren’t core to the portfolio of client services and don’t generate sufficient ROI. Large regional banks with assets in excess of $50 billion may continue making strategic acquisitions to better tackle regulatory compliance overhead. Smaller regional banks approaching $50 billion in assets will try to get comfortably above that mark to attain operational and compliance heft that systemically important financial institutions require. However, most M&A activity will take place among banks with assets between $1 billion and $10 billion. “Since we primarily live in the under $10 billion world we are okay with this.

I spoke with Chris Marinac of FIG Partners also had some comments on M& in community banks when I talked with him earlier this week. When I asked him if M&A was coming to an end or was still a secular trend he told me “I think it's definitely a secular trend. I think M&A is here to stay. I think if anything, M&A accelerates because of higher prices. Currencies really drive M&A. What happens over time is that stock prices tend to have wider dispersion regarding their evaluations. That is beginning to develop, and I think it will continue to occur as 2017 unfolds, and what that means is that there's a bigger spread on the price-to-tangible-book, and as that happens, the buyers distinguish themselves from the sellers, and more transactions can happen.

“There are still many boards of directors who I would say are tired by the environment. They certainly were scared by what went on during the financial crisis years, and they remember what it felt like. And when they're given an opportunity to come out at a reasonable price, and particularly when they can take strong currencies from the buyer, I think there are enough banks who will say yes and take that on. I think the decision was made a long time ago that they would like to sell. It was just a question of when they could get a reasonable price. This is still an ego game, and the egos don't like when they have to take a low price, and something that is seen to be less than a real market bid. Now that pricing has come back, I think egos can very much be massaged into feeling good about a particular M&A transaction, and if the pricing is much better.”

“So I still think the number of M&A deals will be higher at '17 versus '16 and '15, and I think that there are going to be some banks who decide not to sell because they feel a little bit less pressure from the regulations. But honestly, I think there are enough boards who want to get a transaction done because the pricing is better, and that they can get a price that they can be happy with and feel good about. That's where I think the ego comment is important because I think this is an exercise in human behavior as much as it is finance.”

Both Deloitte and Chris had some comments on cyber security as well. The Deloitte report said that “While core cybersecurity threats remain the same, more sophisticated threat vectors are emerging resulting in greater impact. For example, in addition to distributed denial-of-service (DDoS) attacks, denial-of-system attacks that make enterprise-wide information systems completely inoperable are likely to increase. With cloud adoption accelerating, encryption, identity, and access management are likely to dominate the agenda. Also, regulatory pressure is likely to increase, forcing banks to focus more on regulatory compliance rather than risk mitigation.”

Chris Marinac was in agreement telling me that “the concept of cyber security in the regulatory framework is awfully important. In fact, I would say that cyber might drive certain companies out of business, because the regulators are as serious as a heart attack about banks and boards of directors being all in on cyber. That's in spending, and it's also just an attitude commitment that you have to be vigilant 24/7 on cyber security, and you have to be on guard, and if you're not, that's going to create regulatory decimation where there's going to be some of the companies who just can't take it, and they have to move on. So I feel like the cyber, and the tech spending is still a real topic, and that if anything, companies might be investing savings that they're getting on taxes. If we get tax reform, or frankly better spreads, which I think are going to happen, you might see companies taking the revenue from a better margin, and perhaps stronger net income because of taxes, and reinvesting some of those profits back into technology spending to not only make sure that they're in line with the rest of the Jones' but also that they're ahead, that they can anticipate the problems. The cyber issues, large and small are still out there. “

Write this down. If we did a remake of Mrs. Robinson today, Mr. McGuire’s one word would be “Cyber.” All the great new things that technologists and pundits see happening are heavily reliant on cyber security. FinTech, EdTech, robotics, driverless cars, virtual reality, the list goes on and on, and every single one of them is hackable and will require a constant and expensive vigilance on cyber security. You need to be aware of the best companies and emerging technologies in cyber security because lacking an EMP blast that takes us back to the stone ages Cyber Security is the going to happen 100 to 1 sector right now. Be patient, buy at a good price but be aware of what is going on in the sector and who is doing it.

Happy Year to you all and best wishes for a happy, safe and prosperous 2017. Will be kicking back at home this year as over the years I have had one too many drinks spilled on my suit, one too many overindulgers puking on my shoes and paid way too much money for high priced poorly prepared “special “ dinners that weren’t. We will break out the bourbon, some good wine and spend a nice, safe evening watching those foolish enough to flock to Times Squarer freeze their butts off and most likely pee their pants to welcome 2017. Of course for New Year's day we will cook up the pork roast and black eyed peas to greet the year. I am not particularly superstitious, but I do like a tasty tradition.

Have a great week everyone


Cyber is the new word. Just ask

Posted to The Community Bank Investor… on Dec 29, 2016 — 2:12 PM
Comments ({[comments.length]})
Sort By:
Loading Comments
No comments. Break the ice and be the first!
Error loading comments Click here to retry
No comments found matching this filter
Want to add a comment? Take me to the new comment box!

Reviews Average Rating          

See All Reviews →