Saturday, November 19, 2016

Are You a Bank With Benefits?

The American Bankers Association (ABA) recently announced a new benefit to assist its employees with repaying student debt. Beginning next month, ABA will provide each eligible employee up to $1,200 per year toward the payment of student debt, in addition to their current compensation. According to the Society for Human Resource Management, only four percent of employers nationwide offer this benefit

Is this an altruistic statement regarding the $1.4 trillion of student debt in America, or a prudent employee benefit targeting recent college graduates that each average $30,000 in student debt?

I recently proposed this topic for my firm's podcast, This Month In Banking, which is released on the last Wednesday of every month. Shot down. Too boring. But hey, I have a blog too! And I think it is an extremely important topic in talent acquisition and retention.

According to the Bureau of Labor Statistics June 2016 report, salaries, commissions and bonus accounted for 68.6% of total compensation, and benefits accounted for the remaining 31.4%. This is an increase from 29.9% in 2013. So benefits is a large, and increasing proportion of total compensation.

What makes the ABA announcement interesting is: 1) it is a benefit specific for those that carry student debt, meaning mostly millennials, and 2) that they felt they should announce it.

I don't think it is a mystery that bank employees seem to be getting older. And that succession planning in our industry is an issue. Since the financial crisis our industry's brand as a go-to employer has been hurt. And hurt badly. 

How do we attract quality, younger people and then retain them to be the future leaders of our industry? 

What employees value is in the eye of the beholder. Younger workers, for example, value cash on the barrel-head. Less important would be insurance (health or life), and retirement benefits. Not that it is unimportant. According to the Willis Towers Watson Global Benefit Attitudes Survey (What a mouthful! Some marketing person should revisit that title.), only 42% of US respondents said they would opt for more pay/bonus as opposed to other benefits if they had the choice (see chart). So other employees have different priorities.

For younger employees, there are some startups that focus on benefits important to them, such as Gradifi, that focuses on student loan paydown. Imagine the recruitment and retention with this benefit!

But as this benefit becomes less important to employees, perhaps a migration to something more meaningful, such as a greater 401k match, a more robust health plan, or life insurance benefits. Is it practical to earmark certain benefits dollars per full-time employee, and let them select, in menu fashion, what is important to them? For example, the recent college graduate may opt for a student loan paydown benefit, and take a high-deductible HSA health insurance option, rather than the traditional plan.

I think what is clear is that benefits that are important to your employees differ over different times in their life cycle.

Can bankers devise a cost-effective benefits program that recognizes this, would help them attract the best talent, and keep them?

~ Jeff

Thursday, November 10, 2016

What Did a Trump Victory Do To Bank Stocks?

The S&P 500 futures plunged during November 8th's vote count when Donald Trump started pulling ahead. The nosedive gave the news media, who could hardly bare to report good news for Trump, some bad news to deliver. The market was betting a Trump win would be a disaster for equities.

But in a surprise turnaround, the next day when the dust settled and pundits were begrudgingly calling Mr. Trump President-elect, the market turned the tide. Traders were indecisive during the first 90 minutes of trading the next morning, and then came a buying spree that elevated the index to a gain of 1.43%. When things settled down, the final tally for November 9th was a 1.11% gain. So much for that Citi prognostication of an immediate 3%-5% haircut. How much do those analysts get paid?

But what happened with bank stocks? Surely there would be volatility with Trump's carping about over regulation. No industry suffered through more regulation since 2008 than the banking industry, right? And the Consumer Financial Protection Bureau, that reports to no one and has carte blanche to regulate institutions over $10 billion in assets, would surely not sit well in a Trump presidency.

Let's take a look. I analyzed the difference in stock prices of all publicly traded financial institutions that trade over 10,000 shares per day on US markets. I used October 31st as the base period, and the closing price on November 9th. Highlights can be found in the table below.

Disaster, averted.

In fact, the biggest loser in the systemically important >$50B category (SIFI) was a Canadian bank. Yes, I know they don't count towards our SIFIs, but still. A little humorous that a Canadian bank would suffer a decline. They are about to receive a significant amount of our celebrities! Looking further up the list for the next worst SIFI, I find National Bank of Canada, then Bank of Montreal. I had to go all the way to Huntington Bancshares to find a US-based SIFI. And they gained 2.9% from Halloween until November 9th!

I should note that three of our clients are in the Top 10 Gainers. I'm not trying to claim causation, just putting it out there.

The average stock price gain of all US publicly traded financial institutions between Halloween and November 9th was 4.2%. There was no catastrophe. No meteoric rise. Just another day at the office.

~ Jeff

Monday, November 07, 2016

Guest Post: Quarterly Economic Commentary by Dorothy Jaworski

The third quarter of 2016 was relatively quiet after the surprise of the Brexit vote at the end of the second quarter.  There is a Presidential election coming and perhaps people are exhausted by it.  I cannot wait for the political TV ads to end.  But, either way, we will have a new President come January, 2017.  As far as the markets go, volatility has tamed down and prices respond to economic data releases and Fed speak, but not much else.  All I keep seeing is mixed economic data.  GDP for the 2Q16 was +1.4%, following +.8% in 1Q16.  Surely the 3Q16 will be better, but the 4Q16 will follow with a weak reading if it follows the typical pattern of the past several years.

There is NO momentum and really NO catalyst on the horizon to push GDP up above 2% to a more acceptable level, like 3% to 4%, except maybe Lady Gaga’s new album.  Job growth has been stronger than average at +1.7% each year since 2010, despite a declining labor force participation rate.  However, the job growth is not translating into higher consumer spending.  I think that job growth is symptomatic of weak productivity, which has risen by less than half of 1% from 2010 to 2015, compared to an average annual growth of 1.5% from WWII to 2009.

Our Federal Reserve keeps talking about raising interest rates.  Why?  Maybe they believe they must because rates are so low.  I think they are overlooking the fundamental causes of the weak growth - low rate environment- the high debt-to-GDP ratios- involving government, corporate, and consumer debt- and existing in every major country in the world.

Government Debt
Debt keeps mounting, especially government debt.  Let’s look at the US.  In the past 10 years, $7.9 trillion was borrowed to cover deficits but debt increased by $11 trillion, if other “spending” projects are included.  The Congressional Budget Office projects deficits at $9.2 trillion in the next 10 years and total debt issued to be another $13 trillion!  We are already over the 100% debt-to-GDP level that causes indigestion.  Other countries are in the same boat- Japan, China, all of Europe, and Australia.  Why do I write about this debt?  Because it is the high government debt levels that are crowding out private sector investment and that are pushing GDP and interest rates lower.  High government debt levels are hurting productivity, corporate profits, industrial production, and consumer spending.

Government spending is also crowding out consumers and businesses.  Recently, I have read Dr. Lacy Hunt’s materials and seen the research that shows that government spending is actually creating a negative multiplier; that is, every dollar of government spending is hurting GDP growth.  As government spending rises, GDP has fallen along with investment and productivity.  All we need to do is look around; we are living it. 

Investment managers are sitting on a near record level of cash in their funds, currently at 5.8%.  Banks are sitting on huge reserves at the Fed.  We are stuck in this endless liquidity trap for now.  So what does it mean?  Slow growth and low rates should continue.

The Fed
Someone said to me that if the Fed doesn’t raise rates now, they won’t have any tools later to use to fight recession, when it comes.  I disagree.  The Fed can use Quantitative Easing, or “QE,” again to buy bonds to keep rates low.  Janet Yellen recently said she is open to the notion of purchasing corporate debt, as is being done by the ECB in Europe, provided that Congress agrees and approves it with legislation.  Another tool that was fairly effective in the years after 2008 was Forward Guidance, which involved Fed promises to keep rates low until specific dates in the future; this tool was one of Ben Bernanke’s faves.  There is also the negative interest rate path, tried by other countries, but unproven so far.

I have noticed that the future inflation gauge published by ECRI has been rising steadily for months, with increases being larger on a year-over-year basis.  The gauge tries to forecast inflation six to nine months from now and things would be bleak if the projections came true.  I am sure the Fed has taken notice, and they, like myself, are trying to figure out if this is transitory.  I believe that it is, because the producer price index is still low and prices are not yet ready to flow through to consumers, despite higher than average increases in wages.  Average hourly earnings have risen 2.6% compared to last year.  Another factor worth noting is that gold prices have risen 19% year-to-date in 2016, but are off their worst levels; this commodity could be a safe haven for Brits fleeing Brexit.  Inflation is not a problem right now; getting GDP growth to exceed 2% certainly is.

Rates are low for several reasons- low economic growth, high debt-to-GDP levels, low inflation, and low productivity.  What do I see as I look out into 2017?  Low growth, low rates, no momentum, and high debt levels will continue to dominate.  I don’t believe inflation is an imminent threat because growth is so weak.  The Fed doesn’t either, as they project inflation to be under 2.0% into 2018.  Most notably, they seem to agree with me that economic growth will continue to be low.  Or is it that I agree with them?  Stay tuned!

Thanks for reading!   10/24/16

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy has been with Penn Community Bank and its predecessor since November, 2004. She is the author of Just Another Good Soldier, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.