2016 Banking Outlook: Mick Nitsch

Mick Nitsch keeps an eye on federal interest rates as M&A activity rises and the industry continues its post-recession climb.

2016 Projection More consolidation and slow, steady growth of the industry.

SBJ: In 2015, the banking industry had over 270 mergers and acquisitions. Will that trend continue in 2016?
Mick Nitsch: It’s going to continue to uptrend, just as we have for the last three years. I would expect something along the line of 300 to 350 announced M&A transactions in 2016. That would represent between a 10 to 25 percent increase in M&A activity.  

SBJ: Why is M&A activity growing?
Nitsch: Slow growth. Nationwide, you’ve got a still (rebounding) economy. It doesn’t provide a whole lot of upside for growth in these organizations. In order to continue to produce shareholder returns, you’ve got to become very efficient at what you do and part of that has to do with scale – becoming larger in size and maximizing your efficiencies with your cost structure.

SBJ: The Federal Reserve increased its prime rate in 2015. What’s the outcome?
Nitsch: It primarily impacts business loans, because most business loans are tied to the prime interest rate. The prime interest rate did increase from 3.25 to 3.5 percent with the 25 basis point uptick by the Fed. For the most part, deposit rates are not going to be impacted by this increase. Banks have experienced margin compression for years as rates came down. In order for the banks to get that margin spread back to pre-2008, we’ve got to allow the Fed to raise rates probably two or three times before we really see much impact on the deposit side.

SBJ: Will the Fed make further moves in 2016?
Nitsch: My personal prediction is there will be one, possibly two, additional rate hikes. But that would be the very most that we would see in 2016. That’s painting a very optimistic view of the economy going forward. Worst-case scenario is we get no hikes. Inflation is running about 1.6 percent nationwide, and the Fed’s target is 2 percent inflation. Until we pierce the 2 percent inflation mark, I wouldn’t expect any more Fed rate increases. I think it will take months before we pierce that inflation threshold. We’re probably looking at earliest mid-year 2016 and we could be looking at late in the year.

SBJ: Do you see banks increasing revenue?
Nitsch: I do. I think noninterest income across the industry will be up 5 to 8 percent, and that will lead the revenue growth for the industry. I don’t expect a lot of growth on the margin side, just simply because the first 25 basis point increase in rates will not impact all the loans in the universe. It will take time for the margin side of it to really have any impact on growth in revenue.

SBJ: How will loans perform in 2016?
Nitsch: Loan demand will continue to trend upward just as it has the last three years, although it will be a long way before we get back to the ’90s and the early 2000 years. We’re going to see 3 to 5 percent loan growth nationwide and Springfield should pretty much mirror the national trend.

SBJ: What banking technology do you see coming?
Nitsch: Everybody likes convenience and point-of-sale credit to buy their merchandise. How do we expand credit in a way that allows consumers more flexibility in a manner that is identity-protected? I think something is in the works that’s along the lines of a chip that would be carried with you in the form of a ring you wear on your finger. It might be a watch you put on your hand. It might be a chip you insert under your skin. But it has a component to it that only you can validate, and it requires you to use a thumb, a finger, an eyeball impression – some type of physical characteristic unique to your human DNA. That may be way out there, but I don’t think we’re too far off from having something that is very safe and offers more convenience.

SBJ: Will new branch openings pick up?
Nitsch: It doesn’t make economical sense from a financial standpoint to open new branches. The cost of a new facility today is about $2 million. By the time you staff that facility and you open it, you’ve got to be at $30 to $40 million of loan business and deposit business in order for that branch to make a decent return on investment.