By Ray Birch
LAKE FOREST, Ill.–The “fabric of financial institutions” will continue to change in 2022, according to one person, who said credit union leaders must be prepared for new fintech competition, what rising oil prices will mean, and even a change in the marketplace not seen since the 19th century.
But before exploring any of those forecasts, one person is offering a cautionary reminder.
“A professor at the University of Chicago, Milton Friedman, won a Nobel Prize for proving it foolish to predict or estimate what will happen in the economy beyond six months,” said Michael Moebs, economist and CEO of Moebs $ervices, who believes attempting to predict the economy beyond six months is “playing with dynamite.”
But over the first six months of 2022 Moebs sees significant scenarios developing that he believes all financial institutions must be ready to address.
“This is an assessment of the next six months in financial services, but with no guarantee beyond that point,” said Moebs.
What to Expect in ’22
Fintechs will continue to expand into banking at a lightning pace, Moebs predicted.
“With superior open technology and marketing insight not curtailed by decades of banking tradition, fintechs will be a huge competitor for large and small financial institutions, especially outfits like Chime, Dave, etc., which are moving aggressively. Watch your checking accounts.”
Moebs added it’s possible the Federal Reserve may use its monetary and regulatory powers to even charter fintechs.
Meanwhile, oil is on a path to hit $80 a barrel and natural gas costs to rise to more than $6 per MMBTU.
“This will affect compensation at depositories as well as non-interest expense. Can these supply disruptions be offset by Fed Chair Powell’s deflation moves in commodities?” asked Moebs.
A Historical Development
2022 will bring another development, as well, according to Moebs, who notes the number of financial institutions, excluding fintechs, corporate credit unions, and “banker banks” will fall below 10,000 for the first time since the beginning of the 19th century.
“Depositories and transactions are digital. Selling is by Zoom meetings. The fabric of financial institutions is changing rapidly. Do not be a bystander.”
The number of people employed depositories will decline, as well, said Moebs, from 2,380,532 in 2021 to fewer than 2.2 million in 2022. Moebs further suggested that as more staff work from home many will agree to less money to keep that work structure in place.
Depositories under $500 million in assets will decline in employees by 4.5%, while those above that threshold will rise by 1.1%, Moebs said.
Michael Moebs
Reduction in Branches
With the decline in financial institutions will also come a reduction in branches, Moebs said. After peaking at 122,061 in 2008, the number of all financial institution branches will drop under 100,000, he forecast.
“Can depositories personalize selling via Zoom?” Moebs asked. “Forcing consumers to come into a branch and not making information available via the web and phone is a kiss of death.”
Not surprisingly, given the trend lines, assets in millions per employee will rise at banks, savings institutions, and credit unions. “Basic comparative standard for 2022 will be $11 million in assets per employee. Fintechs are now much higher. CUs are lower, and are at risk.”
Then there’s the other big issue of interest to credit unions.
“Compared to 2018, loans grew 8% last year, yet deposits rose 40% as consumers stored deposits in brick buildings, afraid of the COVID wolf and did not spend even for the holidays,” said Moebs. “This will continue until COVID passes.”
Other Predictions
Moebs’ Other Forecasts
- Net interest margin for all depositories bounced backed in 2021 to 90.7% of pre-COVID level of 2.79% in 2018. However, interest income for all FIs was only 66.5% of norm, and interest expense was 21.4% of norm. “Small businesses are benefiting while the depository saver is losing—this is common in any major recession—which is what the COVID pandemic is in pure economic terms,” Moebs said.
- Compared to 2018, overall total non-interest income among FIs fell 10.5%, yet business fees fell only 7.9%, while consumer fees fell 23.9% with the bulk of consumers fees being overdrafts. “Time to reduce fee prices,” said Moebs.
- Non-interest expenses continue to fall to 12.7% since 2018. “Yet wages and salaries are the huge decline, not people,” Moebs said. Net operating income is 99.7% of 2018 levels, or statistically the same in 2021 as 2018, Moebs noted.
The Year of the Comeback
“2021 was the year of the comeback for depositories,” concluded Moebs. “While the income statement has normalized, loans are still down. Fee income is a viable path to a better bottom line. Yet fee prices must be reduced with an emphasis on relationship pricing to avoid fees entirely. non-interest expenses are the big winner in getting net operating income back to financial normality.
There are wild cards in play—energy prices, COVID and the possibility of Russia invading the Ukraine, he continued. “If that happens oil and gas prices will soar. Consumers will pay for higher energy costs with funds stored in deposits. This is a significant wild card for all depositories to monitor. Also, COVID needs to end to avoid a massive recession.”