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What a Difference a Month Makes
During the past month in particular, bank stock values have fallen dramatically. This has been driven by a combination of rising interest rates, a slowdown in the real estate market, fears of inflation, and credit quality cracks. The tone in the market has changed and, frankly, a bit of a “mob mentality” has surfaced as investors attempt to preserve paper profits.

Unsupported Fears or Reality?
Numerous economic indicators remain favorable, such as low unemployment and a growing GNP, but those are offset by fears of inflation, rising interest rates, and a sense that real estate values may have peaked. As we have learned, confidence is such a critical element in the market and there seems to have been a loss of confidence as the upcoming tumultuous midterm elections are upon us.

What Does All of this Mean?
If bank stock prices reduce, it is likely that at least initially, fewer deals will be made and many banks will just hunker down for the winter. Also, credit quality and concentrations will be scrutinized more carefully. The rest of this year will be watched carefully, particularly 2018 earnings reports. Then we will see. No doubt, some additional credit quality cracks will surface as the cycle begins to change. Not pushing the panic button, but exercising caution would be prudent.

What Should Banks Do?

  1. Get ahead of a changing credit cycle. Proactively review and follow up on any soft or lagging credits. Address concerns sooner rather than later. 
  2. Maintain healthy communication with your regulators. Now is not the time to play hide and seek. Identify and address issues promptly. 
  3. Preserve capital. Notwithstanding short-term quick fixes like stock buybacks, maintaining strong capital is the smart move. Capital is, and always has been, king with the regulators. 
  4. If you are able to do deals, double down on due diligence, as either a buyer or seller, on the loan portfolio. You can bleed elsewhere, but you will hemorrhage from bad credits. 
  5. Stay focused and stick to your knitting. Continue to do the things that made you successful and pay attention to the details.

One Last Word
While this is not a panic alert, it is a recognition that things are changing. Accordingly, it is prudent to be wary of a softening economy and the likely side effects that will accompany it.