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Brighter economic prospects bolster banking.

Brighter Economic Prospects Bolster Banking

...But managers of the state's financial institutions agree that long-term uncertainties remain.

In 1989, amid the aftershocks of recession, the Anchorage Chamber of Commerce gathered the state's leading bankers for a luncheon panel to reflect on the state of the economy and the banking industry. A record crowd showed up.

This year, as the dust was finally settling from the crash of 1986, the Alaska State Chamber of Commerce convened a similar panel; again the room was packed, but there were significant differences. For one thing, the new bank on the block, Northrim, sent a panelist, reflecting an important development in the state's banking industry. For another, the bankers were whistling a happier, lighter tune, as if finally convinced that the economic cheerleading of the state's media and business boosters has some substance to it.

Why the high turnout for these presentations? Dave Cuddy, senior vice president at First National Bank of Anchorage, speculates that bankers are seen as credible economic informants because of their many interactions with clients around the state. As people try to bring certainty to their decisions about investments, business expansion, college financing, and retirement, they want to learn "what facts bankers use to project the city and state economy. I think some people may be shopping for loans."

Not only that, Alaska's banks now are shopping aggressively for customers to whom they can loan, signaling an important milestone on the road to robust recovery.

The near-term forecast delivered by Cuddy and the other panelists was indeed upbeat. "We all agreed that the next 18 months look great," says Cuddy.

Adds Robert Gray, president of National Bank of Alaska: "I think the banking industry in Alaska is one of the strongest of any in the United States. The imprudent lenders paid the price and they're not here anymore."

But beyond the two-year horizon, fears that oil prices will drop again dampen the feelings of optimism in the minds of some observers. How soon before Iraqi and Kuwaiti oil hit the world markets? Will the Arctic National Wildlife Refuge be opened to development?

Ron Kukes, vice president and Alaska manager for First Interstate Bank of Alaska, notes, "A lot of it has to do with state employment. It's everyone's belief that we will see less oil revenues next year. (There's a lot of oil revenue this year). The concern is we're not going to see that continue."

Says Cuddy, "We may have some problems as the state has to cut back its state spending." He explains that the resulting loss of jobs could be a "major factor in what the economy of the mid-90s looks like." Cuddy notes there are a lot of unknowns, including whether the state's economy can grow enough to replace the reductions in state spending.

Mike Burns, president of Key Bank of Alaska, also stresses the importance of a healthy state economy to vitality in the banking industry. He says, "Probably the most significant indicator of bank health is the health of the economy itself. If we're doing our job exactly right, we can be as healthy as the economy. We can never be better." The present economy is pretty favorable, Burns adds.

Future Hazards. But Alaska's banking industry is bracketed on one hand by a recent recession that brought down 14 financial institutions and on the other hand by the profound difficulty of forecasting the insidious uncertainties of the oil patch. Those realities restrain the optimism of bankers, who temper discussions of the outlook with cautions. The marketing strategies of several financial institutions focus on consumer banking -- car and home-improvement loans and credit cards -- a perfect niche for the prosperous sailing predicted for the next 18 months.

Although most bankers cite improving real estate statistics to document the industry's health at the moment, the painful memories of the recent past make them less enthusiastic about lending in the longer-term real estate market. "We're concerned about the midterm, 10- to 15-year real estate loans," says Cuddy.

There are differences among Alaska's banks: size, region, operation under either a state or federal charter, public or private ownership, control by a local company or an interstate banking corporation. But experts stress these differences are not evident in the indices of health in the industry.

All banks feel the "same pressures on the profit picture," notes Ralph Holliday, president of Security Pacific Bank Alaska. He adds. "We don't view the market differently. We are in the basic business of gathering deposits and extending credit."

One key indicator of banking health, says NBA's Gray, is bank profitability. He notes the industry's profitability is "dramatically better than it was three or four years ago."

Gray says loan delinquency rates in general are way down. He explains that NBA's home loan delinquencies, in particular, have fallen from a high of 18 percent in January 1988 to 5 percent in May 1991. "That's our portion, but that's representative," Gray adds.

Ironically, as the recovery continues, banks may be a little out front of customers in some areas. "The current level of lending activity is probably up a little bit. We'd like to have more loans on our books than we've got, but we don't have enough opportunities," says Gray. "A lot of people got hurt real bad, so they don't have the foundation to expand the way they'd like."

Burns' perception of the loan market also parallels Gray's. "Loans are growing pretty well right now," Burns says. "Most banks around the state are quite hungry for loans. We wish there was more, but there's pretty healthy demand right now."

Security Pacific Bank Alaska's Holliday explains that the feelings of relief stemming from economic improvement are not likely to lead to wild or dramatic changes in lending practices. "When you're in boom time, the basic attitude is there's no way you can lose. You develop a mindset that there's no way this deal can go wrong. The banks that have survived have survived because they didn't stretch policies like other banks," he says.

Holliday feels banks have an important responsibility both to their shareholders and to the public at large to reduce the kind of risk-taking that can cause or deepen recessions. "Quality becomes extremely important in projecting future performance. It behooves all of the banks to be prudent lenders during the recovery and not get caught up in speculative lending. The surviving banks are in good shape and ready to move ahead with the economy. I have lived through this in other states," he says.

According to First National's Cuddy, prudence seems to be the prevailing policy in the industry at the moment. Although he notes the other banks are not as well capitalized nor as profitable as the two giants, First National and NBA, Cuddy points out that they're in much better shape and more conservatively run than were banks in the mid-80s.

Key Bank's Burns puts bad banking and lousy lending policies third on the list of recession causes, after overheated state spending and the drop in oil prices. He admits Key Bank had its share of problems during the recession.

Burns says today Key Bank's loan officers are taking a broader look at the loan application, including a closer analysis of the marketplace and the competitive environment.

Burns expects recovery in the Railbelt to be more dramatic largely because the region had a deeper hole from which to climb. He is optimistic about economic prospects for Kodiak, Prince William Sound, Southeast and the Interior.

"A bright spot on the horizon is mining in Juneau. That's a lot of jobs, that's a very big deal for that community. The only one that's giving us concern right now is the timber industry," says Burns. The fear is that drops in world markets and uncertainties over effects of Tongass National Forest reforms will squeeze a large number of people and businesses that depend on logging.

As Alaskans tentatively celebrate their improving economic lot, the bombardment of bad banking news continues unabated in the national print and broadcast media. Following a decade of de-regulatory upheaval that forced banks everywhere to rethink, or re-invent, their strategic advantage in the financial marketplace, the state's banks are watching closely the development of industry reforms in Congress.

Despite the prospect of continuing change in bank and financial services practices that could make it harder to compete with money market mutual funds and brokerage funds, most banks in Alaska seem more focused for the moment on how to assert a competitive edge in the local marketplace.

"One thing we're emphasizing now is the consumer lending area, because we didn't have a market share commensurate with our market share in other areas," says Gray. He also expects NBA to continue improving its local branch positions.

"We will be very aggressive in the marketplace," says Security Pacific's Holliday. "But we will assure ourselves that we are being prudent lenders. We want to do more business with more people, but you still have to be selective."

Holliday says his bank has been known historically as a commercial lender. He sees opportunity for a larger volume in that area and for expansion in consumer and small-business lending.

Cuddy, at First National Bank of Anchorage, says, "We're looking for across-the-board loans and transactions." He says the bank also will seek to increase its deposit base in the near future, relying on "cross-selling" of services: urging depositors to take out loans and trying to persuade loan customers to open checking and savings accounts.

Key Bank's Burns says, "We can't run a bank to prepare for another 1987. ... You can't run a business on a worst, worst case scenario. We're real optimistic about what we see on the short-term horizon. We're going to keep doing what we're doing, but we're going to do it more places."

Bill Moran, president of First Bank of Ketchikan, says he subscribes to the consistently conservative approach to banking often attributed to NBA and First National. "We typically don't try to forecast. We try to develop a game plan and stick to it. We just try to run a good bank. The principles hold, whether the economy is booming or not," he adds.

"That way, the economy doesn't damage the bank, and the bank doesn't damage the economy."
COPYRIGHT 1991 Alaska Business Publishing Company, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:economic prospects for the banking industry in Alaska
Author:Richardson, Jeffrey
Publication:Alaska Business Monthly
Date:Jul 1, 1991
Words:1715
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