Here I go again, taking a big swing of the bat and likely striking out. Last year I made some predictions that look quite foolish in hindsight.
To quote William Shakespeare, “A fool thinks himself to be wise, but a wise man knows himself to be a fool.” I assure you that I know myself to be a fool.
Trends and observations are much easier than predictions. My trends were on point. There is continued pressure on interest rates, which have taken a toll on net interest margins. Banks are looking for ways to cut costs to improve operating leverage. Branch closures and headcount cuts have affected both big banks and regional competitors.
Wearables continue to grow in popularity — but not as quickly as I expected. Apple, Samsung, Fitbit and Google are leading the pack. Virtual reality goggles are the latest fad. Look for their continued growth in popularity.
Finally, the Uberization of our industry has taken place. Customers are demanding more pay per use financial products. In a 2016 study commissioned by the Equipment Leasing & Finance Foundation, The Alta Group estimated that managed solution transactions will reach more than 22% of total U.S. equipment leasing volume over the next three to five years.
My observation about continued interest rate pressures having a negative impact on industry profitability remains true. With only one small interest rate hike in December, the pressure is unrelenting.
Another observation aimed at identifying the new 800-pound gorilla to replace GE Capital. One might surmise that Wells Fargo will fill the role, but the jury is still out on this one.
Lastly, my observation about slowing economic growth — represented by the pendulum reaching the end of its favorable stride — may be off by a year or more. The economy remains strong, unemployment continues to decrease and inflation remains in check.
On to the embarrassing part: my ridiculous predictions for 2016.
First, I predicted that a top independent lessor would be hacked, resulting in a security breach. This may have happened, but who would ever admit it? I am not aware of any major security breach in 2016 among any top independent lessors. Not to say that it hasn’t or won’t happen in the future.
In January 2016, Richard Bove, one of my favorite bank analysts, predicted that 2016 would be the biggest year in a decade for bank mergers, fueled by the costs of regulations. I predicted that two of the nine domestic commercial banks in asset size, which followed the four banks that represent the trillion dollar club, would merge to create a super duper regional bank in the range of $500 billion in assets. Huntington Bank bought FirstMerit to create a strong regional force, but not a super duper regional bank. Once again, I was dead wrong.
I got one thing right: fintech. While several folks still don’t know what fintech is, it is starting to have a material effect on our industry. I predicted that fintech would both disrupt and enable the equipment finance and leasing business in 2016, and it did just that.
According to Tech City News, fintechs are leading the digital transformation of commercial finance. By utilizing big data and cloud technology, fintechs are doing what the big banks cannot, due to their size and inflexibility. The convergence of finance and technology drives efficiency and effectiveness, better known as proficiency. Fintech will continue to have a measurable impact on our industry for years to come.
I had one more prediction, a last minute tongue-in-cheek conjecture thrown out on a whim because I thought it was a no-brainer and represented a tiny bit of humor. I predicted that Hillary Clinton would win the presidency in a tight race against an unnamed adversary to become the first female president of the U.S. Not only did I predict this in in January, but I also reiterated it in the fall conference issue. Wow! Who would have known? What shock and awe. Donald Trump trumped us all. I can’t believe he is now the 45th President of the U.S., and I am shocked that Clinton is at home in Chappaqua, NY.
Now, I once again face the daunting task of taking a stance on the events of the next year.
Trend: Specialization is evolving into an industry standard. Many companies specialize in markets, credit types, equipment or financial products. This focus on particular niches seems to be growing. Some leasing people do nothing but upgrade incandescent lighting to LED. Others specialize in power purchase agreements for solar panel manufacturers or only do fair market value transactions for telecom equipment. That’s all they do! My father used to say if I did only one thing really well, I could make a good living. I didn’t take his advice, but apparently others did.
Specialization is flourishing, and specialists are thriving.
Observation: Big bank leasing companies are not doing as well as they would like you to believe. Please take this as opinion, not fact. I think the big banks are struggling in the current environment and coming up short on their margin projections, which is directly affecting their bottom line profits. Miss a few years’ worth of profit projections and you are sure to lose the confidence of the big bosses. Pricing volatility is the major culprit here. Start a steady and predictable increase in interest rates and this abomination will go away. Please, Federal Reserve, please!
Prediction: The Federal Reserve will increase interest rates four times in 2017, and two of those four increases will be 50 basis points or more. After more than a decade of artificially low interest rates and virtually no increases, why might there suddenly be an onslaught of hikes? Two simple words: Donald Trump. Trump has promised economic growth, and he has cited China’s former growth rates of 6% to 7% as very replicable in the U.S., given the right conditions. Treasury secretary nominee Steven Mnuchin recently played down Trump’s growth forecasts and reestablished an expectation of 3% growth, a position that Trump had abandoned more than a year ago. Nevertheless, in my opinion, Trump will position the U.S. for economic growth, which will trigger a response from the Fed through interest rate hikes. Follow this one closely.
Trend: Accepting the unacceptable is the new pricing norm. Last year I suggested that prolonged abuse of pricing diligence would result in dysfunctional portfolios, unbearable yields and years’ worth of pain. Certain lenders are accepting sub-100 basis point spreads on less than stellar credits because they crave the volume credit that comes with booking the deals. Who does that? How stupid! Financial services companies rely on revenues derived from the interest bearing assets in their portfolios to create income. This is simple arithmetic, folks. If the interest rate on the earning assets decreases due to pricing pressures, but the expenses associated with originating and servicing those assets stay the same or increase, you make less income. Lower returns are lousy results. You lose. Period.
Observation: This country is fractured, nearly beyond repair. The left is in disbelief while the right is looking over their shoulders saying, “Did that really happen?” One question remains: Is either side sufficiently inflamed to do something about it? We have a new president: Donald Trump. I did not vote for him, nor did I wish for him to be our president. However, I am a big believer in patriotism, doing what is best for the country and backing our leaders. So I will be supportive of the new president and hope that he leads our country into fiscal prosperity and global strength. For those who are disgusted by the man, hate his politics, despise his pompous narcissistic behavior — get over it. You have no say in the matter for the next four years. Give the man a chance before you deem him unworthy of the position, or go ahead and move to Canada or Costa Rica as your Facebook posts threatened.
Prediction: Fintechs will become acquisition targets of the big banks in 2017. The novelty of fintechs is wearing off as their business models mature and the marketplace views them as serious contenders. Recently, Comptroller of the Currency Thomas Curry announced plans for a special national bank charter that would allow fintechs to offer financial products without requiring state-by-state regulatory approval. Curry believes fintechs can help consumers who don’t want to or can’t afford to establish accounts with traditional banks. Last year, I suggested that fintechs would both disrupt and enable our industry. This year, the banks will take notice and seek out fintechs with business models that complement their own. While JPMorgan Chase CEO Jamie Dimon quipped that “fintechs have nothing on us,” claiming his bank has technological superiority, a Citibank study forecasts fintechs growing to 17% of the consumer banking market by 2023. Pay attention, this one is for real.
Trend: Railcars, aircraft, yellow iron, Class 8 trucks, forklifts, barges, machine tools and other hard assets have been the traditional equipment financed by our industry. We financed hard assets. We kicked tires, looked under hoods and reviewed hours of usage. We measured remaining tread and checked for engine overhauls — all part of our due diligence process. Slowly and steadily the share of software and services have increased as a percentage of the overall equipment finance and leasing market. These intangibles are quickly becoming some of the largest asset classes in our industry. This transition has been underway for more than a decade and will continue as the U.S. becomes more of a service economy.
Observation: Looking back on 2016, one thing that really stood out among the flurry of activity was mergers and acquisitions. First was the rumored sale of DLL, which was later quelled. Then the sale of Creekridge to Hitachi Capital, the purchase of Connext Financial by ENGS Commercial Finance and the acquisition of FirstMerit by Huntington Bancshares, which created a $100 billion regional force. The formal integration of GE Capital Transportation Finance into BMO Harris, large pieces of GE’s commercial and vendor finance units into Wells Fargo and GE’s fleet business into what was Element Financial — now known as Element Fleet Management and ECN Capital. While interest rates remain low, I would expect to see continued M&A activity in 2017.
Prediction: With a Republican led Congress and a Republican heading the executive branch, I expect to see quick and decisive action during the first 100 days of the Trump administration. He will nominate a Supreme Court Justice, attempt to repeal Obamacare, challenge current immigration laws, talk about building a wall (talk being the key word) and continue to use Twitter as a means of communicating with his many loyal followers. If his cabinet nominees are any indication of how he will run his administration, expect the multiple billionaires — a group of highly successful people — to bring an outsider’s view to the traditional political environment. It will be fascinating to watch it as it unfolds. I am cautiously optimistic about the possible outcomes. Stay tuned!
Don’t take anything written here too seriously. I certainly don’t. Your feedback and differing opinions are always welcome at firstname.lastname@example.org.