By Joe Palumbo
When I was a kid a common phrase to determine a sure thing was “you could take it to the bank.” The general consensus was that banks always made money. However, with mortgage rates shrinking to levels of 40 years ago the banking industry is finding it more difficult to insure profits and market share.
In walking the streets of Queens, I touched base with Richard Gelman, chairman of the board of the National Bank of New York City with headquarters in Flushing. I asked him how he is coping with the interest rate environment and how it is affecting his bottom line. He explained that because of their smaller size they are able to maintain a great deal of flexibility.
For example, they are able to fill niches in customizing the client’s specific needs. Due to pending and existing loan payoffs, additional business eventually is generated and, he said, “my cost of money also becomes less.” I asked him if he sees a bottom to interest rates. It appears that the indicator is real estate. But until then business will be tough for the larger thrifts that lack the lean private flexibility of a National Bank of New York City.
Some bigger thrifts with former headquarters in Queens now just have branches in Queens, such as Astoria Financial, Greenpoint Financial and New York Community Bank. The unparalleled burst in the refinancing of home mortgages has cut deeply into profit margins.
Thirty-year fixed mortgages have dropped to their lowest levels in more than 30 years. Back then a cup of coffee was just 15 cents, the subway was just 30 cents and you could actually go to some selective movie houses for less then a buck.
Could coffee shops, the transit system or cinemas survive at those levels today? Of course not! So then how can the banks? How will this affect the banking business? Look for the smaller banks that have been formally insulated by higher stock prices to be high on the acquisition list.
Why? Because their prices have been falling and are becoming attractive. The general rule of the marketplace always has been buy low and sell high. If the trend continues, the stage will be set for big banks to focus on bargain opportunities and small banks to find an end to their pain. Of course, if the economy turns around and rates start to rise, an 11th-hour reprieve is a possibility.
But then again, there is yet another glitch in the banking industry. What about U.S. war bonds? If our rich uncle decides to sell bonds at competitively priced rates, look for even more moans and groans from the banking industry.
So “How’s Business” in banking? Absolutely great if you are the borrower, since the price of money is like a 15-cent cup of coffee. But if you are the bank, it’s time to sharpen your pencil and hope that the long-awaited revival in the economy that is expected comes sooner, rather than later.
Joe Palumbo is a private asset manager as well as the fund manager for The Palco Group, Inc., an investment company at www.palcogroup.com or 461-8317.
