🔒As banks battle for talent, interest rates will weigh heavily on commercial loan demand in 2023

The performance of the banking industry often mirrors the performance of the overall economy.

That’s why it should be of little surprise that Connecticut bankers are keeping a close eye on interest rates, inflation and other economic indicators to get a sense of whether a much-debated recession will strike in 2023.

Since the pandemic began, Connecticut banks have held up relatively well financially. Through the first three quarters of 2022, the 31 banks headquartered in the state saw slightly higher profitability and sizable increases in assets, deposits and loans.

HBJ recently talked to four bank CEOs about the industry’s 2023 outlook. They included:

• Matthew Hummel, market president and commercial sales leader of KeyBank ($187.7 billion in assets);
• Lesa Vanotti, president and CEO of Torrington Savings Bank ($927.8 million in assets);
• Stephen Lewis, president and CEO of Thomaston Savings Bank ($1.6 billion in assets); and
• Michael Weinstock, executive vice president and Hartford regional president of M&T Bank ($197.7 billion in assets).

Here are some trends to watch.

Interest rate pressure

Thomaston Savings’ Lewis said the Federal Reserve’s interest rate hikes have caused borrowing costs to significantly increase on all loans including mortgages, commercial and consumer debt and credit cards.

He said deposit and loan interest rates will continue to rise in 2023. So far, deposit rates have increased at a slower pace but that could change this year as customers seek out investment and deposit products that pay higher rates.

“As such, I expect banks seeking to retain existing customers to significantly increase rates,” Lewis said. “And banks will offer account opening incentives to attract new customers.”

KeyBank’s Hummel said higher interest rates, inflation, expectations of an impending recession, and general geopolitical unrest are creating a level of economic uncertainty and volatility that’s impacting commercial loan demand, which he expects to soften over the next year.

“We are seeing a softening in M&A activity, corporate real estate and commercial lending activities in general as business owners take a pause on investments to wait out the market volatility,” Hummel said. “While current incremental interest rate increases from 3% to 6% are not yet taking a huge economic toll, they are certainly driving a psychological one as buyers experience sticker shock and sellers see their asset valuations decreasing.”

Vanotti said rapidly rising interest rates have also slowed the housing market, and home prices that soared during the pandemic remain high, essentially pricing first-time homebuyers out of the market.

“Housing has a ripple effect on other parts of the economy, furniture, appliances and other home goods,” she said.

Battle for talent

As of October 2022, the total U.S. labor force was approximately 3 million workers below pre-pandemic levels, according to M&T Bank’s Weinstock.

“In Connecticut, we’re seeing a battle for talent in the banking industry as we’re looking to identify and grow tenured and seasoned people,” he said. “For newer (employees) to the industry, we must focus on investment in training and professional development.”

Lewis said banks are most in need of technical talent in areas such as data analytics, credit analysis and IT.

Vanotti said local banks have benefited from recent merger activity, which has made available some experienced bankers. But banks are struggling to find talent to staff branches, which have traditionally served as a key talent pipeline.

“In addition, we have many areas where the skill sets are transferable to other industries: accounting, IT, HR, marketing, so we must work twice as hard to keep them engaged,” she said. “Work from home, a phrase no banker said ever pre-pandemic, is now a reality as well. Existing staff and potential candidates expect it. It’s a brand-new business model that our industry will continue to adjust to in 2023.”

Digital, online trends here to stay

The pandemic accelerated consumers’ transition to digital banking (mobile and online) out of necessity, and the convenience and ability to transact in real-time has changed banking behaviors permanently, Hummel said.

“Even older clients who may have preferred transacting at the branch before have continued to use digital products,” he said.

Banks small and large will continue to invest in digital capabilities as a growth strategy, bankers said.

Cybercrime and fraud

However, the rise of online and mobile banking also increases the risks of cybercrime and fraud.

All forms of attacks increased during the pandemic, according to Lewis, including ransomware, social engineering, account takeover, crypto attacks, malicious insider activity and phishing.

The volume and sophistication of cybercrime and fraud will increase in 2023, Lewis said. So will the cost to combat those threats.

“Companies and individuals need to use multiple tools to mitigate the risk of cybercrime and fraud, including updated software, antivirus systems, password managers, multifactor authentication, VPNs, employee training, etc.,” Lewis said. “Cybercrime and fraud will be a top risk for all businesses and government for many years to come.”

Branch transformation

As banks focus more investment on digital tools it’s also led to branch closures.

From June 2021 to June 2022, Connecticut banks shed a net 48 branches, Federal Deposit Insurance Corp. data shows.

But banks aren’t just focused on thinning their brick-and-mortar networks. They are also rethinking the role of branches.

Hummel said KeyBank is redesigning its branches and refocusing its workforce less on transactional activities and more on providing financial guidance on “moment-of-truth” financial decisions, such as buying a house, paying for college, starting a business or planning for retirement.

In 2023, banks will “continue to work toward finding the right balance between brick-and-mortar banking and digital financial services,” Hummel said.