Recovery To Continue Despite Indecision In Washington; Some Insurance Lines Expected To Rise
By Tiffany Rider - Senior Writer
January 15, 2013 - In what is shaping up to be a continuation of 2012’s path, executives in the financial services industry are predicting fewer bank failures and more consolidations, a continued decrease in Eurozone investment, prices increasing for several lines of insurance and more regulation of financial institutions in 2013.
On top of credit and debit card swipe fee regulations that have assisted retailers and consumers to the tune of $18 million a day, according to the National Retail Federation, and new oversight on the derivative market, more guidelines from 2010’s Dodd-Frank financial reform law are expected to be defined in 2013.
On January 7, the Federal Reserve announced that it reached an agreement with the Office of the Comptroller of the Currency and 10 mortgage lenders resulting in $8.5 billion going back to borrowers – $3.3 billion in cash payments to eligible borrowers and $5.2 billion in mortgage assistance through loan modifications and deficiency judgment forgiveness.
To further assistance in the mortgage lending sector, Dodd-Frank’s quality mortgage rule was recently defined by the Consumer Financial Protection Bureau (CFPB) to protect consumers seeking home loans. Allowing time for lending institutions to comply, this rule is expected to take effect January 10, 2014.
These and other regulations are aimed to strengthen and secure future transactions within the financial services industry, helping to quell concern around safety and soundness that continues into 2013.
Capital Markets: Focus On Emerging Markets, More Transparency
“Dodd-Frank is very complex legislation impacting much of the financial industry including the municipal bond area, mortgages, derivatives, precious metals, cross border business, the list goes on,” according to Lisa Petrie, managing director and senior portfolio manager for The Petrie Group of Wells Fargo Advisors. “To make matters worse, several of the original committee members are stepping down so ‘clarification’ may take quite a while. Hopefully all the uncertainty and the new rules will not impede the investor’s ability to do business. The consequences for the advisor are probably more paperwork and more regulation.”
While it may complicate the business model, Bryson Financial Wealth Manager Ryan Niedbalski said in an e-mail that regulatory reforms “protecting the public from the Bernie Madoff’s of the world is an essential aspect of our profession.”
“When it comes to individual clients expressing concern of sound business practices, the answer is simple to us – transparency,” he said. “If accountability and transparency are rightfully placed at the forefront of any business philosophy, the client apprehension is generally muted at that level.”
In an economic recovery moving at a slower pace than any other economic recovery since World War II, 2013 contends to be what Niedbalski is calling “another interesting, if not confounding, year in the capital markets.”
“Our [best-case] scenario is a hopeful one in which we continue our tepid recovery from the Great Recession,” he said. “It’s interesting to note the current recovery is actually running at about half the speed of all recoveries since WWII. This is mainly due to the nature of the Great Recession being dissimilar from those. In order to drastically increase the speed of the United States’ economic reclamation, it’s imperative many factors come together in harmony.”
Those factors include banks lending to both consumers and small businesses, export growth on a sustainable path, policy transparency in Washington and a clearer vision for managing inflation from the Federal Reserve.
“At the forefront of this list is, and will remain, the economic policy decisions coming from Congress and Washington,” Niedbalski said. “Properly addressing our nation’s most pointed topics – the growing deficit and entitlement reform – are essential to putting us on a path of sustainable growth and economic prosperity. Of course there is a risk of not efficiently crossing all these bridges that lie in front of us. Proactively managing that risk will be the key driver of return for our clients in 2013.”
In the view of Petrie, market highs are close to returning to 2007 levels – a reflection of the United States working its way out of the recession by seeking resolution to the fiscal cliff, debt ceiling and sequester, while keeping interest rates and inflation low.
“2013 looks to provide opportunity and investment normality,” Petrie said in an e-mail. “The economic growth and recovery seems to allow for increased GDP, close to that of the 30-year average. . . . Individual stocks, particularly increasing dividend stocks, should offer a terrific risk/reward for investors.” The Petrie Group, formerly associated with UBS Financial, transitioned to Wells Fargo Advisors because it “had the best combination of investment options, lending capabilities and excellent credit ratings,” Petrie said.
Emerging markets remain attractive as economies continue to grow overseas. Petrie said she expects continued economic acceleration in these markets should benefit currencies, sovereign debt, industrial commodities, petroleum and metals, including gold. “Companies with improving cash flow and increasing dividends, regardless of the country, should provide excellent returns for investors,” she said.
Though Neidbalski said Bryson Financial is not “overly bullish on global equities as a whole,” there are opportunities in Asia. “Paired with domestic high yield debt and [emerging market] market debt, global equities can offer an attractive risk adjusted return, particularly in areas such as Japan and, hopefully, China,” he said. Investment monies should continue to be directed toward U.S. and Asian markets as well, Neidbalski said, due to the risk aversion of the Eurozone fiscal issues.
Banking: Clean Balance Sheets, More Consolidation
Banking executives are in agreement that 2013 will include continued economic recovery, with fewer bank closures and continued consolidation through mergers and acquisitions.
“It’s not as though the economy is robust, but we have a clean balance sheet and are committed to putting capital into those businesses and real estate investors with the vision to expand, to grow,” Stephen Gordon, CEO of Opus Bank, told the Business Journal. Opus, which currently holds above $3 billion in assets, bought three banks and some bank branches in the past year and made more than $1 billion in loans. “This year that [lending] number is going to be up by 30 percent,” Gordon said.
At City National Bank, expectations for growth are targeted in California and New York with new branches opening in 2013. “We see the economy firming and more and more companies cautiously optimistic about their own expansion plans,” Rod Banks, executive vice president of commercial banking for City National in Los Angeles, said in an e-mailed statement. “We have not stopped growing – despite the recession. Since 2008, City National has opened 17 new offices, grown its deposit base 85 percent, increased its sales staff by one-third, and grown assets by more than 60 percent. We also bought a leasing company and an investment firm. We will continue to grow in 2013.”
In general, banks with clean balance sheets are becoming profitable and the provision for loan losses have gone down. Long Beach-based Farmers & Merchants Bank is an example of this, having no loan losses in 2012 and remaining profitable, according to W. Henry Walker, bank president. “We’ve exceeded the industry,” Walker told the Business Journal.
2013 is expected to show fewer bank failures on the national and local level, Walker said. Gordon agreed, noting, “Anything left would be small and uneventful.” What will happen are mergers and acquisitions – activities that will reduce the number of bank brands available to consumers. “California is extremely overbanked, and a consolidation wave needs to occur here,” Gordon said. “There are too many banks that exist statewide. That number is going to shrink. The same goes for the Pacific Northwest.”
Walker attributed continued consolidation of banks to the effects of the financial reforms laid out in the Dodd-Frank legislation passed in 2010 and its creation of the Consumer Financial Protection Bureau. “Our government has overregulated business – medical, banking, construction – to such an enormous degree that it is difficult for businesses to make a profit,” Walker said. “The smaller you are, the less economies of scale you have. To deal with the regulations present, you have to have some size to survive. The conjecture I hear is that banks below $1 billion, and for sure $500 million, in assets are going to have a lot of struggles maintaining the infrastructure with this new level of regulation.”
Farmers & Merchants Bank holds $5 billion in assets and is among the top 150 largest banks in the country, along with City National Bank ($26.3 billion in assets as of September 2012) and Wells Fargo ($1.375 trillion in assets as of September 2012).
Ben Alvarado, senior vice president and regional president of Wells Fargo’s Orange County region, told the Business Journal the bank is looking to add branches in Orange County and the Long Beach area he covers, including Los Altos and Belmont Shore.
“Our vision and mission remains the same, and that is to satisfy our customer’s needs,” he said. That includes providing new ways for customers to connect with the bank and their accounts, such as online and mobile banking. “We are always looking at improving the technology of our online banking tools,” he said. “Now customers are telling us they like to use their smartphones. We are trying to be where the customer is.”
Opus Bank’s Gordon said he understands the “need to embrace and adopt technological improvements,” though before doing so it is wise to “determine how technology fits into what we do and what the benefits are.
“Just because something is cool, like taking a picture of a check and e-mailing it, doesn’t mean it’s increasing profitability,” he said, referring to remote deposit capture. “Banks also need to look at the return on investment in order to adopt the technology.” Opus offers online banking and online bill pay for both business and personal account holders, and remote deposit capture exclusively to business clients.
Security of these transaction channels is also of concern, according to F&M’s Walker. “When it comes to technology, there are standards in the industry that everyone has to step up to and meet,” he said. “We meet and exceed the standards for security. I believe we meet the standards for the products that the consumers demand.”
A growing market to assist those who have difficulties maintaining a bank account is that of prepaid cards. Some banks provide them, including Wells Fargo. “That is something our customers want,” Alvarado said. “We encourage our customers to build and maintain good credit. It is a service that our customers have asked for that we are trying to provide for them.”
Others are concerned with prepaid cards’ growth in popularity. “One of the things that is a worry of the government on prepaid is the issue of money laundering,” Walker said. “That will be significant in the coming years by both the rules and regulations under anti-money laundering. But it’s also a product that is banking the un-bankable. That’s not necessarily a safe manner [because] the controls aren’t as strongly in place.”
Though prepaid cards are among the fastest growing segments of the industry, banks’ opinions on them vary. According to a survey by the Mercator Advisory Group and American Bankers Association released last November, 85 percent of banks that provide either general purpose reloadable cards, payroll cards or gift cards “view current demand for prepaid products as favorable or highly favorable.” Among banks that do not offer prepaid cards, 34 percent had concerns about regulatory compliance and 26 percent were apprehensive of the profitability of the cards.
“It’s a challenge for the banking industry because it is a true scale business,” Gordon said. “But it is kind of tough to bank the un-bankable. From a platform standpoint, it’s a lot of small balances and small transactions, which are much smaller than what we do at Opus. But there are companies like Citi and Bank of America that are more comfortably situated to handle that type of business.”
Insurance: Prices Increasing For Health, Workers’ Compensation Lines
Insurance prices for various policies are expected to increase this year, from health insurance to flood insurance, workers’ compensation and other business lines, according to Kelly Williams, president of Long Beach-based Kelly Williams Insurance.
“I think in areas that have been hit and, for whatever reason, people think are going to get hit, it’s probably going to increase,” Williams said of natural disaster insurance lines. “That’s the South and East Coast. It might go up here, but we haven’t really seen it. The National Flood Insurance would determine it. I expect it to go up a little bit, but it’s budgeted by the government so it’s what they decide as well.”
On January 13, President Obama signed supplemental legislation approved by Congress that included extending the Federal Emergency Management Agency’s (FEMA) borrowing power by $9.7 billion. This extension allowed FEMA – the agency mandated by Congress to administer the National Flood Insurance Program – to make funds available for paying claims related to Superstorm Sandy.
Several insurance industry groups supported Congress and Obama in this action, however coastal communities should expect higher natural disaster insurance premiums as a result of the repeated hurricane damage to the coast. “On the East Coast, they expect prices to continue to go up,” Williams said.
Rising healthcare premiums are a concern nationwide, impacted by provisions of the Patient Protection and Affordable Care Act (ACA), including the individual mandate. “While the ACA does provide premium and cost-sharing subsidies to help low- and moderate-income Americans purchase insurance, data from the Congressional Budget Office show that millions of people are not eligible for subsidies and the amount of the subsidy declines significantly as incomes rise,” according to the trade association America’s Health Insurance Plans (AHIP).
“Beginning in 2014, the ACA imposes a massive new sales tax on health insurance that will increase costs for people purchasing coverage on their own, small employers, Medicare Advantage beneficiaries, and state Medicaid managed care programs,” said the AHIP in a statement. “The amount of the tax will be $8 billion in 2014, increasing to $14.3 billion in 2018, and increased based on premium trend thereafter. The Joint Committee on Taxation estimates that the health insurance tax will exceed $100 billion over the next 10 years.”
Another one of the biggest insurance concerns among California business owners is the significant increase in certain workers’ compensation class codes, according to Williams. “People have really gotten hit,” he said. “In some of the heavier class codes we’ve seen 20 to 25 percent increases this year.” Those class codes with heavier risk include jobs in construction, trucking and other similar labors.
Williams provided this example of how significant workers’ compensation costs are, specifically for California employers: The price for a workers’ compensation renewal for a restaurant owner in Arizona this year would cost 35 to 40 percent less than if that restaurant was located in California for the same coverage.
“One of the big reasons is medical costs,” he said. “When people get injured, part of the payments is for making them get better. We’ve seen medical costs skyrocket, so that’s a large portion of it. Other parts are the court cases, when they pass things that liberalize what kind of benefit and how long people can be out. All of these little court cases add up and cause people to be out longer and expand what qualifies. I think with the downturn of the economy you’ve seen more fraud. People have just stayed out longer because they’re afraid of losing their benefit.”
To combat health and disability insurance fraud, Gov. Jerry Brown signed into law Assembly Bill 2138 last year to provide increased funding for district attorneys and the California Department of Insurance enforcement personnel to investigate and prosecute those who scam the system.
“Insurance fraud is a multi-billion dollar criminal enterprise that every consumer pays for through higher premiums,” California Insurance Commissioner Dave Jones said in a statement. “Anything we can do to support our local law enforcement partners in putting a stop to fraud is a step toward protecting consumers.”