In many ways, 2017 is looking up for financial institutions. Quarterly net income is trending upward, lending is up, the stock market is up, unemployment is down, interest rates have started to rise, etc.
In other ways, however, there are reasons for caution. It has been nearly nine years since the last major economic downturn, and the sharp increase in lending portends the possibility of a correction of sorts. In addition, there were fewer unicorns (startups valued at over $1 billion) in 2016 than in prior years, signifying less enthusiasm from venture capitalists.
In a sentence: 2017 is the year for cautious optimism.
There's a lot to unpack here, so we'll start with a summary. See details for each bullet point below this list.
- GDP has ticked upward from where it was in 2008, but it's still not at pre-crisis levels.
- Unemployment is still trending downward, though it's starting to level off
- When it comes to quarterly net income at banks, 2016 was a banner year.
- The total debt balance is back to where it was at the beginning of 2008.
- Federal student loans, commercial loans, and industrial loans have all seen sharp increases.
- 2016 saw fewer unicorns (companies valued over $1 billion) than 2014 or 2015.
- Investment banking faced an earnings problem in 2016.
- Banks and credit unions are wisely focused on digital innovation and smarter data analytics.
Let’s dive into the specifics.
US GDP Annual Growth Rate 1997 to 2017
As you can see, the financial crisis of 2008 hampered the annual growth rate. It has rebounded somewhat, but it's still not what it used to be.
On average, the annual GDP growth rate in the US has been trending downward for decades, making it appear that this trend will continue through 2017.
US GDP Annual Growth Rate 1950 to 2017
The US still has the highest GDP by raw amount, but countries like China and India are currently growing at a quicker pace. China and India also have far lower debt to GDP ratios, indicating that they're holding to their strategy of saving. Chances are that unless something widespread changes dramatically in world economies, these trends will continue into 2017.
Economic Comparision: Nine Countries by GDP
(Source: Trading Economics)
While GDP has gone flat, the Dow is on fire.
Sharp upward movement like this looks good, but historically it hasn't come without some sort of correction...
We can see an inverse trend happening with unemployment.
Unemployment Rate 1997 to 2017
Lower unemployment and recovering GDP correlates with higher loan volume. In fact, total personal debt balance is back up to 2008 levels, which is a two-edged sword. On the one hand, lenders are making more money. On the other hand, consumers are burdened with debt.
At this same time, housing prices are back to pre-crisis levels.
And student loans have seen a particularly steep rise.
Commercial and industrial loans have seen a sharp uptick as well.
Total Commercial and Industrial Loans
It's worth noting from this graph that the major upticks in commercial and industrial loans in the late 1990s and late 2000s were followed by downturns.
You can see how things are heating up by looking at the sheer number of unicorns (companies valued at over a billion dollars) in 2014 to 2015.
In 2016, the number of unicorns went down, signifying a turn in the trend that will likely continue into 2017.
Effective Federal Funds Rate 2007 to 2017
At the end of 2016 we saw the first uptick in the federal funds rate since the crisis, indicating a trend that will likely continue into 2017.
Another trend that is certain to continue is the consistent downward line in banks and credit unions. Total commercial banks dropped from around 14,000 in 1985 to just over 5,000 in 2016.
Total Commercial Banks in the US
Credit unions have declined at a similar pace.
At the same time, both credit unions and banks now have more assets. Banks have gone from having less than $4 trillion in assets in 1990 to having more than $16 trillion in 2016. That's more than a 4-fold increase in 26 years.
Total Assets, All Commercial Banks
Credit unions have gone from having total assets of under $0.2 trillion in 1990 to having over $1.2 trillion in 2016. That's more than a 6-fold increase in 26 years — a faster growth rate than the banks (even though it's roughly one sixteenth of the total assets of banks).
Number of New FDIC-insured Bank Charters
We'll add the 2016 numbers from the FDIC on new bank charters when we get them. For now, we can only assume that 2017 will bring the same trend of either zero or one new banks. Credit unions have seen a decline in new charters as well (though not so dramatic as banks).
Fortunately, the number of problem banks will likely continue to decline into 2017.
All of this has resulted in solid increases in quarterly net operating revenue for the majority of banks.
And yet all was not well for the big six banks, which saw a decrease in earnings from Q1 2015 to Q1 2016.
Big Six US Banks' Earnings
This decrease might have something to do with the fact that the investment banking is struggling. Wells Fargo has the smallest investment banking division of the bunch (and saw the smallest decline in earnings), while Morgan Stanley and Goldman Sachs are by definition investment banks (and saw the largest decline in earnings).
There are many factors at play in the earnings decline, but one might be the increasing popularity of Vanguard and other index funds — funds that drive revenue away from investment banking.
It's clear that Wall Street needs to find new strategies if they want to survive the retreat to passive investing.
These new strategies will almost certainly center around enhancing the digital experience and data analytics. Consumers are increasingly demanding better mobile experiences, as shown from Javelin Research.
The Federal Reserve shows that nearly 70% of millennials use mobile banking.
Because of this, banking executives wisely say that digital experiences and data analytics are their two top strategic priorities in 2017.
This emphasis on the digital experience and data analytics fits with consumer demands. In fact, big banks surpassed their competitors in 2016 largely because they offer a better digital experience.
At the same time, member satisfaction at credit unions has gone flat — likely because they're behind on offering a better digital experience.
Member Satisfaction at Credit Unions
However, just because big banks got high marks on their digital offerings doesn't mean they are safe.
Accenture has found that people who have switched financial services providers switched to online-virtual banks from large and national banks.
In other words, consumers want better digital experiences, but they don't have any loyalty to traditional bank brands. If a solution comes along that offers them a better experience, they'll take it.
And many tech giants are itching to carve out space for themselves in financial services, starting with payments:
Overall it seems like most banking executives are on the right path. They know that consumer demands are forcing them to focus on digital innovation and smarter data analytics. They know they're facing pressure from traditional competitors as well as new players in the space.
Will they be able to move fast enough to get ahead? Will the positive trends in recent years face normal market corrections in 2017?
We can't know for sure, but all signs point to the idea of being cautiously optimistic and doubling down on digital innovation and smarter data analytics.