Increased capital expenditures key area for banks

After several years of flat spending on capital investments, some local bank executives believe the trend will turn around during 2003.

"For the last two years you've seen a real slide in capital expenditures, and that has had a lot to do with why the economy has moved along at anemic pace," said Bill Owen, executive vice president of UMB Bank's south-central region. Owen also is legislative chair of the Missouri Bankers Association.

"The first half, you've got some things out there that are going to put upward pressure on interest rates. As rates start to move back up, the baton is going to have to be passed from the consumer to the public and corporate sector to sustain economic growth and re-ignite economic growth, and at this juncture, it's just not there. As we get into the latter half of the year, we might start seeing some of that. Right now, 2003 will start out very similar to the way 2002 has been."

Larry Manry, senior vice president with Bank of America, echoed Owen's thoughts.

"We're thinking probably a slow start for the first quarter of the year, picking up through the year. (2002) was more flat than anything else," Manry said. "We're looking forward to growth again. In talking to our clients, so are they.

"But there has been a general hesitancy about strong capital investment of buying equipment and that type of thing. We're hopeful there's some pent-up demand."

The lack of capital expenditures by businesses is the result of overbuilding during the 1990s, Owen said.

"With the advent of the Internet, and on the computer and telecommunications sides, there was a build-out in anticipation of need that really went beyond the (actual) need," Owen said. "So we developed an over capacity in some areas of the economy. We reached a point where some people said, We don't need any more capital expenditures because we have more capacity than we need.' "

With low interest rates, however, bank executives believe the time is right for businesses to increase their debt loads.

"If you have a strong balance sheet, (a business should) be looking at some debt right now to do some capital improvement," Manry said.

Some businesses already have been taking advantage of low interest rates to finance real estate, according to John Ford, small-business client manager with Bank of America.

"A lot of companies that probably wouldn't buy real estate are buying real estate now and locking in long-term rates because they're so low," Ford said. "A lot of people are building their own buildings and extra space, and then leasing it out to help pay for their own space. We are seeing a little trend for that."

While there is no crystal ball for what interest rates will do, the consensus is that rates will slowly rise during the year.

"I would expect (rates to increase) in the spring and summer of the year," Manry said. "But not going up as fast as they went down. We think there's still a lot of cash in the marketplace to be absorbed, and there's a lot of capital investment to take place."

Owen said government deficits resulting from tax cuts and increased defense spending will prod interest rates slightly higher.

Despite manufacturing job losses in 2002, bank executives believe that southwest Missouri is still in a good position to weather the slow national economy.

"We're fortunate in this market in that we see some inherent strength by population growth and strong work ethic in our market that has, not insulated us from the downturn, but has kept it from being severe," Manry said.

Said Owen, "We're a little bit insulated in the fact that we have more of a service sector and tourist economy. Not having that large smokestack industry, we don't tend to see the booms and the busts. We'll be a little better off than the economy in general."

One trend that concerns Owen and the Missouri Bankers Association is the difficulty in drawing deposits to some banks.

"The percentage of deposits in the state is not growing," Owen said. "The number of deposits in commercial banks is not increasing, but business funding needs are.

" Because of the difficulty in drawing deposits, (banks) reach a point where they are getting lent up. That means of the money they have to give out, they've pretty much lent it all out. As you get closer to 100 percent of loans-to-deposits, there is a tendency of saying we've got to be more selective in practices because there's not a whole lot left to lend out.

The deposit crunch is because there are more nonbank competitors trying to get into the banking business.

"It has to do with mutual funds on Wall Street, insurance companies getting into the banking business, credit unions that have gone outside their traditional role of business," Owen said. "But many of our competitors aren't the ones who tend to make the commercial loans. Credit unions are not the driver of business loans. As they take more and more deposits, it's that much less to be lent out to businesses.

"The last thing we want to do is choke off the economic recovery engine in this state because commercial banks have been choked off in their ability to attract deposits."