The so-called credit crunch may have started in the banking sector, but it's spread to infect all other sectors of the economy -- cyclical or otherwise. Since hitting their peaks in October 2007, the S&P 500 and Dow are down around 40% each.
News headlines are no longer dominated by banks and the credit market. This financial crisis has brought about occurrences that seemed highly unlikely just eight months ago:
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Microsoft
(NASDAQ:MSFT) reported its first-ever quarterly dip in revenue as a public company. - General Motors has needed government aid, but still remains dangerously close to bankruptcy.
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General Electric
(NYSE:GE) was dealt a credit-rating downgrade, and was forced to cut its dividend for the first time since the Great Depression.
Are things beginning to turn?
But glimmers of sunshine seem to be peeking through the clouds. Over the past month, the major indexes are up handsomely, and the Financial Select Sector SPDRs
To get a sense of the overall picture of banking, lending, and credit, I set out to talk with the CEOs of regional banks in various regions of the country.
First up is Kelly King, CEO of BB&T
We explored a number of different topics, including consumer and corporate credit; the real estate market; and the government's policies to ease stresses on the credit markets. While he believes that in general, credit markets are still declining, King sees some signs of improvement.
What follows is an edited transcript of the interview. (For the full text, visit my CAPS blog.)
Jennifer Schonberger: What are you observing in the markets you serve? Are you seeing signs of recovery?
Kelly King: In general, we're still seeing deterioration in the overall economy; although there seems to be some slowing of the rate of decline. There seems to be some "green shoots," or glimmers of hope -- certainly signs of improved economic activity. So I think the way to describe it in general is still declining, but there appears to be some signs of improvement. Our view is that by the end of this year -- by the third or fourth quarter -- you'll begin to see more consistent signs of improvement, and then not a great, but an OK year in 2010.
Schonberger: To quantify what you're seeing, how do your lending volumes now compare with before this crisis? More specifically, now vs. pre-August 2007 and now vs. the end of 2008?
King: Certainly, volumes started slowing in general during 2008. However, there was some fairly strong activity during the year, because some markets were dislocated. [For instance,] we actually saw some increased commercial loan demand, particularly in the health-care industry, as many large institutions had historically used different forms of capital market financing. So we found a fairly material increase in demand during the course of 2008.
Since the end of the year, we certainly have seen some decline in the rate of lending. It seems there are some slowdowns in the consumer area -- certainly in '08 and into this year, there's been a fairly material decline in consumer borrowing.
Schonberger: Many pundits out there say banks aren't lending; but maybe part of it has to do with the whole deleveraging process -- perhaps the demand side of the equation is to blame, too. Could you add some color on whether your current loan volumes are a result from your end, from the consumer or business side, or a combination of both?
King: I've certainly heard all of the rhetoric about banks not lending, but I personally think there's a huge misunderstanding about what's happened during this crisis to lending in general. When you go back to 30-plus years ago, the commercial banking system, including thrifts, made about 70% to 80% of all the loans that were made. Over the course of the past 30 or so years, there's be a huge disintermediation of the commercial banking system, and a lot of the traditional loans that the banks made moved into the capital markets -- or now what's called the shadow banking industry. Most recently, banks only made about 30% of the loans, with the rest being made through the securitization conduit market out into the capital markets area.
So during 2008, everyone was talking about how lending had frozen up; however, it was not basic commercial bank lending that froze up, it was the shadow bank system that froze up. During 2008, total loans made by commercial banks went up over 5%. In our case, loans went up over 8%. So it's not true to say that the commercial banking system stopped making loans in 2008. It was the capital markets that froze up, versus the commercial banking system.
Schonberger: What is your outlook for the credit card market? Is this a major shoe waiting to drop?
King: I think the credit card market is going to deteriorate fairly significantly over the next year or so. That's where a lot of the excessive borrowing occurred across the board in the consumer sector. Therefore, as individuals have more strained financial capability, as unemployment goes up, certainly you would expect the credit card portfolios in general to deteriorate. I think that will continue right on through 2010.
Schonberger: President Obama is proposing new legislation that would govern credit card fees -- perhaps capping them. How would these new rules affect availability of credit? Is there the potential for this plan to actually make it harder for banks to offer credit especially at a time when the consumer needs it most, as it provides a vital source of liquidity?
King: If they pass controlling legislation with regard to credit cards, it will make the credit card availability less available to consumers, versus more. So while I know they seem to be concerned about some excessive interest rates, by and large, I think that's overrated. The fact is, consumer credit in the credit card area is a fairly risky business, and if the banks aren't allowed to charge appropriate interest rates, they simply won't make those loans.
Schonberger: What's your outlook for the real estate market? Is the worst yet to come?
King: No, I don't think the worst is yet to come. I think in the retail area, we are kind of bouncing around a bottom. It depends on where you are in the country. Certainly, some markets are beginning to turn, while other markets are still deteriorating further. In general, though, I think we are relatively near a bottom in the retail area.
We certainly will see some deterioration in the commercial portfolio, as it kind of has a spillover effect. The degree of that depends on how quickly the stimulus kicks in -- how the consumer responds to the stimulus activity. In summary, I think you could say on the residential side, you're probably nearing a bottom. On the commercial side, you're beginning to see some deterioration -- how deep that gets is really hard to predict.
Schonberger: Circling back to the consumer for a moment, are you seeing improvement in demand for new mortgages, or mostly refinancing?
King: Demand for new mortgages -- we've seen a new positive pick up in new mortgages in the last 60 days or so. The low interest rates and the $8,000 tax credit is really beginning to have an impact, especially on the first-time buyer -- the starter homes. So we're beginning to see a fairly significant improvement in buying activity in those homes and in the associated mortgages.
Schonberger: Could you comment on activity you've observed in the specific states that BB&T serves? Are certain areas more problematic then others?
King: If you look at Florida, it took a real nosedive across the state in terms of the health of residential markets. But you are beginning to see some improved activity, particularly in Southern Florida. The Tampa, St. Petersburg, Naples areas got really hard hit starting three years ago. Even though prices are way down now, year-over-year sales are up significantly. Now you're still seeing difficulty across the board in condominiums, but single family is beginning to improve -- to a lesser degree on the east coast. The northern part of Florida got hit last, so it hasn't seen quite the pickup yet.
If you look at Atlanta, which has been hard hit, you're beginning to see some positive signs in the residential side, where the last few months have been a net absorption of single-family houses. Of course there's still a lot of excess inventory, but the houses are beginning to move. So there's some activity, especially in the lower-end prices.
In general, it's kind of spotty. The Carolinas are beginning to have some difficulty. Unemployment has gone up, but nothing at all like in Atlanta or Florida.
Schonberger: What needs to happen for BB&T to increase lending, or for lending to become more normalized? Is it the economy? Or is it Wall Street? Also, do the comps even matter, because our prior points of comparison are skewed -- in other words, once that happens, should expectations be lowered for a new "normal?"
King: Yes, expectations should be lowered for a new normal. We should not expect consumers to borrow and banks to lend at the levels that we saw in the '90s or the first part of this decade. That was not a healthy, sustainable level. I think the new normal will be lower, and will be good from a long-term viewpoint. Hopefully, it will be less inflationary, and we can chart a path that's slower growth and much more sustainable for long-term growth. If you look at the cause of factors in terms of lending being down, again, you really have to address it from the shadow banking system.
Again, the problem is not the commercial banking system. The commercial banking system grew loans faster than 5%, in 2008, which is a pretty good rate in a recession. Oddly enough, much of the commercial banking system is not only making loans, we're out on the street looking for loans.
Schonberger: When do you expect to see a return to more normalized lending?
King: Given the economic projections, I think we'll begin to see more of the glimmers of light as we head on through this fall and into the end of the year. When we take the year 2010 as a whole, it will start out slower and begin to build a slow improvement, so that the whole year of 2010 will be a positive year. If you take 2009, it's going to be slow. The first quarter was a decline. From here, we should see a slower decline in the second quarter and slightly positive [GDP] by the time we get to the fourth quarter.
Schonberger: Are you feeling more confident in the outlook for credit markets now that government programs such as the TALF and the PPIP are in place? Do you think those programs will work in aiding lending or shoring up the banking sector?
King: There's a lot of reticence with any [government] program because of what happened with the TARP. But even beyond that, the TALF and PPIP are not going to be material programs. First of all, the banks have already had to write these assets down. If the government comes along and tries to buy these assets from the banks at a premium, that would be bad for the taxpayer. If they come along and try to buy them at a big discount, what's the motivation for the banks to sell? They've already written them down. If they hold them, they have a chance of some recovery. If you just buy them at book value, the investor's probably not going to invest. They've reported some activity; but I personally just don't think it's going to be a big deal.
Schonberger: What has the administration done year-to-date that is a positive step in helping to repair the credit markets?
King: There are two things that need to happen in my opinion; one is, we need to give the economy a little bit of time. Everyone in Washington wants to fix this crisis immediately, and you can't fix it immediately. We've put trillions of dollars worth of stimulus into the economy -- probably the right thing to do -- we need to give it a little bit of time and let it slowly heal. It's like someone who's had a heart attack. You can put a stent in, but you can't expect them to go run a marathon the next day. It takes time to recover. It's the same case here.
That said, a lot of what needs to happen today is beginning to happen. The administration is beginning to become more positive. They're beginning to echo some of the positive signs in the economy. Also, don't forget the Federal Reserve has pumped a tremendous amount of money into the system, and we're pumping a tremendous amount of fiscal policy money into the system. So when you put trillions of dollars worth of stimulus into the economy, it is going to make the economy improve. It's a question of is it the spring, summer, fall, but it's going to make a positive difference.
Schonberger: So do you think the stimulus is going to help this so-called improvement in the credit markets and cause the progress to be sustainable? Or will this be sort of the equivalent of a bear market rally in equities -- it gives us a jump start, but then things contract again later in the year?
King: It depends on the reaction by the consumer and the business public. It is a jump start. There is no question that fiscal and monetary stimulus is just that -- a stimulus -- and depending on how the patient and how the consumer/business public responds will determine whether or not it's sustained. I personally think it will be sustained. I think people have been scared, and naturally, there's been a pullback in spending. Once people start to see economic activity looking brighter because of the stimulus effect, they will likely respond positively from a psychological point of view. Then you'll begin to see some return to "normal spending."
Got questions you'd like me to ask other CEOs? Chime in below in the comments section.
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