Now That The Mayans Were Wrong, What Does 2013 Hold in Store?
There are two issues that need to be examined to better assess the prospects for 2013. The first factor is the likely direction of the economy, as this directly impacts the financial activities of consumers and small businesses, and in turn financial institutions. The second is industry-specific concerns. Let’s look at each of these in turn.
The (not entirely) surprising decline in GDP in the fourth quarter of 2012 presages the uncertainty that our economy faces. Four factors will continue to be concerns economically in 2013. First and foremost is the condition of government finances. The recent drama regarding the “fiscal cliff” belies the very serious issues that the Federal Government faces regarding its debt, with over $16 trillion in debt (or over $50,000 per man, woman, and child in the U.S.) A second factor which is likely to limit economic growth in 2013 is continued high levels of consumer debt. Consumer debt (including real estate debt, traditional consumer debt, and credit card debt) remains elevated, even despite the significant foreclosure and default activity of the past five years. A third factor which may limit economic growth is uncertainty in the business sector. The fear of rising tax rates may deter many small businesses from making investments in either people or equipment. Finally, we have to be concerned with the condition of the rest of the world, particularly Europe.
However, two factors are likely to benefit the US economy in 2013. First, real estate markets have finally stabilized, and indications are that most real estate markets are ready to resume a modest growth path. The second major factor which is likely to help our economy is energy. New drilling technologies adopted from the natural gas industry (horizontal drilling, fracturing) have made it economically feasible to now access previously inaccessible North American oil reserves. The end result is that the reliance on foreign energy sources could be substantially lessened in the coming years, and this could be extraordinarily beneficial for the US economy over the coming years.
Both positive and negative factors will influence the economy in 2013. What is likely to be the net impact? Continued high levels of consumer household debt will remain an anchor on growth in 2013. However, if the Administration and Congress are able to come together and address the deficit and debt issues in a meaningful way, we anticipate that 2013 could exhibit stronger growth than we experienced in 2012. It may be reasonable that if Congress and the Administration take meaningful steps towards deficit reduction we could see growth in the 2% to 3% range; the question is how big an “if” this really is.
Economic predictions for 2013:
Prediction: GDP growth will be between 1.5% and 2.5%.
We believe 2013 will be a continuation of the very modest recovery trend seen for the last several years. We technically have been out of recession for three and a half years, but it certainly doesn’t feel like recovery. This state of limbo is likely to continue in 2013.
Prediction: Housing starts will be between 900,000 and one million units.
We expect continued slow improvement in the housing markets in 2013, with both slight improvements in home values as well as an increase in the number of housing starts. However, housing starts will be substantially below the long-term average of 1.5 million units started per year.
Prediction: Unemployment will hover between 7.5% and 8.0%.
The fact is that the reduction is unemployment over the last several years is due more to people leaving the work force (and no longer being counted as unemployed) than to growth in the economy. Continued modest improvements in the labor markets will be countered by an influx of workers re-entering the work force, and as a result we anticipate that unemployment rates will remain close to their current levels.
Prediction: Automobile sales will continue to improve but will still lag pre-recession levels.
Vehicle sales in 2012 totaled 14.5 million units, up over 13% from 2011 levels, the third consecutive year of double digit increase. Don’t expect double digit increases in 2013. Much of the increase in demand in the last three years was pent-up demand as we fell from a high of almost 17 million light vehicles sold in 2005 to slightly more than 10 million sold in 2009. We anticipate light vehicle sales will be between 15.4 and 15.8 million units in 2013.
Prediction: Short term interest rates will remain low but intermediate and long term rates will begin to rise.
This will impact housing market, especially refinance activity, and thereby reduce a significant source of noninterest income for the industry.
There are four particular areas of concern that are likely to be most impactful for financial institutions in 2013.
Net interest margins for the financial services industry moved to near-historic lows in 2012. We anticipate that 2013 will see a continuation of this trend. Federal Reserve policies that have kept interest rates at historic low levels are likely to continue throughout 2013; the result is that assets will continue to price down while the cost of funds runs into the floor rate of 0%. Another concern is cost containment. The improvement in earnings seen in the last two years is due primarily to declining loan loss provisions coupled with a generous helping of non-interest income stemming from heavy refinance activity. Both of these are likely to slow in 2013. As a result, expense control will be significantly more critical to earnings performance in 2013 than in the previous years. But this will be a difficult area to manage due to continued technology spending as well as compliance spending. The third area of concern is regulation. The first month of 2013 has already seen significant actions taken by the CFPB, and undeniably we will see this trend continue throughout the year. Finally, every institution will contend with the impact of the emergence of new technologies, especially in the area of payments.
Industry Predictions for 2013
Prediction: The number of institutions will decline at a faster pace and merger activity will increase due to regulatory and earnings pressure.
Over the past 15 years the number of banks has declined by just under 3% per year, while the number of credit unions has declined by slightly more than 3% per year. Expect both of these numbers to increase. In the banking space, smaller organizations will be absorbed by the regional players, while the very largest banks are less likely to be active acquirers. In the credit union space the number of smaller credit unions will continue to decline at an increasing pace due to economic and regulatory pressures.
Prediction: Efficiency ratios will worsen somewhat in 2013.
The impact of declining margins, less non-interest income and continued spending on technology and compliance will put continued pressure on efficiency ratios for the industry.
Prediction: EMV adoption will accelerate in 2013.
Increasing fraud activity on cards as fraudsters turn their attention to the US and away from Europe and Canada (where chip technology has already been widely implemented) is likely to result in concerted effort to increase chip card usage in the US.
Prediction: Overdraft and NSF income will continue its downward slide.
Regulation and technology, as well as changing consumer behavior, are the reasons why this slide will continue. Checking accounts will resume their more traditional role as the core financial product and profitability will be more dependent on effective cross-selling and less dependent on fee generation.
Prediction: Payments will see more players and more innovation.
This is probably the easiest prediction to make. The payments space will see the most activity in 2013 of all the technology arenas. A big player who may begin to insert themselves in this space is Apple. Consumers will also become more comfortable with these alternative payment options and will begin to utilize tap and pay and other technologies with greater frequency.
These are our predictions for 2013. Let’s see how accurate our crystal ball is over the coming year.| Comments (RSS) |