Financial sector prepares for stiff competition in 2013

Business borrowers who are in pretty good shape and want to finance expansion in 2013 probably will be very happy.

Bankers? No so much.

Interest rates continue to be so low that bankers don't have much margin on their lending, and loan officers are elbowing each other out of the way to get in front of the still-small pool of well-qualified business borrowers in the region.

"We've picked up our calling effort tremendously," says Stan Wilmoth, president of Heritage Bank of Nevada, but demand for loans remains lukewarm.

Part of the problem in recent months, he says, has been the uncertainty of business owners about the outcome of the presidential election and the outcome of negotiations about closing the federal budget gap.

But borrowers who have the financial strength and the courage to wade back into the market find willing lenders.

"This is a wonderful time for customers to go out and buy a commercial building," Wilmoth says, noting that real estate prices remain low.

Recent weeks have seen a flurry of deals involving northern Nevada companies that tap into of Small Business Administration lending programs to lock in low interest rates on building purchases.

Shannon Petersen, executive vice president and corporate banking manager for Nevada State Bank, says her bank's loan officers are seeing a steady improvement in the ability of businesses to qualify for loans.

They've stabilized their cash flows, and many have diversified their operations by the addition of new product lines or decisions to expand geographically.

"We're starting to see loan demand pick up," she says.

Still, Petersen says plenty of uncertainty remains in the market as 2013 dawns, and Nevada State Bank expects that the second half of the year is likely to see a stronger recovery.

But even as loan demand perks up a bit, history is working against banks.

Loans made three or five years ago at higher rates are beginning to come off their books. If the borrower refinances, the new loan is likely to carry today's much lower rates.

The upshot: A bank may need to write two loans at a lower interest rate to generate the same amount of revenue as one loan at the previous, higher rate.

That's almost certain to increase competition among bankers who are chasing a relatively small number of loans, says Larry Charlton, the Nevada regional executive for City National Bank.

Given the pressures on the spread between the rates they pay depositors and the interest they can collect from borrowers, bank executives will be paying close attention to customer fees.

"The larger banks are increasing fees on accounts. Even their 'free' accounts are going away," says Wilmoth, who says his bank continues to search for ways to provide low-fee or no-free services.

But fee increases aren't a sure-fire strategy.

"All banks are looking at fee income, but you've got to be careful with that," says Charlton. "We still compete with each other."

For financial institutions that focus on consumer lending, 2013 is likely to see continued slow growth, says Dean Altus, executive vice president and chief operating officer of Greater Nevada Credit Union.

Low interest rates are likely to continue to fuel home purchases, and that has the potential to act as a catalyst for sectors ranging from construction trades to appliance retailers.

"However, the biggest challenge to the industry is the potential for the economy to slip back into recession. Most regional financial institutions have fully recovered from the last recession, but a second dip could put some additional strain on the industry," says Altus.

SIDEBAR

What to watch in 2013

The federal Dodd-Frank Wall Street Reform and Consumer Protection Act continues to roll out in 2013. Nevada bankers worry that the new rules that cover everything from capital structure to loan disclosure will add to their costs at a time that their margins already are under pressure from low interest rates.