VOL. 132 | NO. 162 | Wednesday, August 16, 2017
One Decade Later: Effects of Financial Crisis Still Linger
By Andy Meek
Ten years removed from the worst financial crisis since the Great Depression, the banking industry has transformed itself and wealth managers say investors remain leery.
Among other things, First Tennessee Bank jettisoned its national mortgage operation in the wake of the crisis. It refocused its attention and efforts around being a strong regional bank, as opposed to one with aggressive national ambitions. It trimmed headcount, boosted investment in technology and began to specialize, creating new industry-specific teams in verticals like health care and music-industry banking.
That latter change, which started ramping up in earnest in 2016, has helped the bank be smarter about the lending-related risks it takes, said First Tennessee Bank president and chief operating officer David Popwell.
“If you went back and looked at the banking industry and our company 10 years ago, people tended to be very focused on size,” Popwell said.
Banks like First Tennessee have made fundamental operational changes since the housing bubble burst and a serious financial crisis gripped the nation a decade ago. (Daily News/Houston Cofield)
When signs of the financial crisis, often called the Great Recession, started showing up in 2007, First Horizon had begun the year with almost $38 billion in assets. As of the second quarter of this year, First Horizon is a roughly $29 billion financial institution.
“Today when we talk about size, we talk about the ability to have economies of scale and invest in technology, not size for size’s sake,” Popwell said. “When we talk about what are our fundamental drivers in how we look at running the business, we’re about driving return on equity. Not just growth for growth’s sake and not just size for size’s sake.
“From a focus standpoint, we’ve also created the specialty lines of business where we have very senior, very tenured people who are running what they refer to in the industry as verticals, where it gives us the opportunity to take risk more intelligently.”
That included last year launching the bank’s first music industry banking group. From Nashville, a team set out to make a play for music industry businesses and professionals – wooing everything from publishers to management firms, labels, artists, songwriters, attorneys and others in the business.
Another change in the aftermath of the financial crisis, Popwell said, is that First Tennessee and the banking industry itself have gotten much better at working to understand customers’ businesses and at forecasting near-term cash flow.
There’s more rigor in how the bank manages and maintains its loan portfolios, he adds, and the bank is better at using data and analytics tools to understand risk.
Marty Kelman, a principal with investment firm Kelman-Lazarov, said he thinks customers may still, even today, have some lingering shell-shock over what they went through financially in 2007-2008 – be it the performance of their financial portfolios to big swings in their home values and lots of other variations on the theme of immediate, unpleasant change.
The playbook that firms like Kelman-Lazarov tried to stick to was helping clients take a holistic view of their finances, irrespective of the ups and downs of the moment.
John Phillips, chief investment officer at Red Door Wealth Management in Memphis, agrees that the emotions of the financial crisis still linger among many consumers.
“People haven’t forgotten … the effect it had on them and their family,” Phillips said. “Most have participated in the 10-year long rally, but there’s still a lot of doubt in the market. People have one eye on their accounts and one eye on the nearest exit in case of a market wobble.
“What’s different for us is there is little euphoria, where we have to caution against piling into the markets. Currently, we have to educate clients on not having an itchy-trigger finger – of emotional selling – and warning against stampeding to the narrow exit with the rest of the herd.”
Other things are different for consumers 10 years on. Most asset values have, Phillips said, seen big increases. Most consumers have deleveraged and gotten their financial house in order, and lending also got tighter in the wake of the housing market bust.
His firm still has concerns that wages have not come back strongly and that the younger generation is coming out of school strapped with increasing debt and chasing “limited jobs with no pay.” That’s as baby boomers are also retiring and spending less.
“Investor sentiment remains subdued even after the market’s massive recovery,” said David Waddell, president, CEO and chief investment strategist with Waddell & Associates. “Today, 34 percent of individual investors are bullish, compared with an historical average of 39 percent. This, with the economy, earnings and index levels at all-time highs. Yes, politics is a downer, but I see this trepidation as more of a Great Recession ‘won’t get fooled again’ manifestation.
“On the positive side, I believe investors, and the industry, have become more financial-planning centric,” Waddell said. “The narrative has shifted from ‘What are my returns?’ to ‘Can I reach my goals?’ In this way, the crisis improved household fiscal discipline and forced investment advisers to provide services rather than sell products. Consumers of investment services are definitely benefitting from this industry maturation.”