What forces will be affecting the bank’s business in 2014?
We have issues [with] low interest rates, which have a certain impact on our revenues and our margins. I would love to have more loans on our books. For decades, for every dollar of deposit, we would have a dollar of loan. Today we have a dollar of deposit and 80¢ of loan. So we have a couple hundred billion sitting on deposit with the Fed earning us next to nothing. We would love to lend that money out. But that’s the result of customers, both corporations and individuals, deleveraging.
The balance sheets have never been so liquid. Consumers are paying down debt and maybe holding up on starting a small business or adding to their business line. On the other hand, I have never seen credit this good in my 32 years at the company.
What about the broader economy?
In the short to intermediate run, it won’t be markedly different from what we saw this year. Now, we had a couple of extra things going against us. We had the tax increase at the first part of this year, so that had a dampening effect on GDP. And then we had a budget issue recently. That will also have an impact. Hopefully, we won’t have that next year.
There are some real positives. I think housing will have another good year. I think auto will have another good year. I think agriculture will do well. Energy will do well. Technology will do well.
On the other side of the coin, we are still not seeing the job creation that the country needs to not only employ the new entrants coming into the workforce, but also take up some of the slack and the unemployment that happened through the downturn. Most of the economists I’ve read are talking about GDP growth next year on a quarterly basis. Most of them will start with a 2. We might have one quarter that might have a 3. I don’t think we’re going to have 4 and 5 percent growth rates, which we really need. Those growth rates start to produce 300,000 and 400,000 jobs a month.
How could Washington help or hurt your business?
I’m all in favor of effective regulation. What I worry about is where well-intended legislators and well-intended regulators pass laws or modify rules that make it more difficult for us to serve our customers. In some cases, those rules have the impact of making less credit available to fewer people at higher prices. Almost every industry I talk to complains about the heavy hand of regulation getting in the way of creating jobs and opportunities. Some of those regulations make sense. But I’m concerned.
Let me give you an example. The Fed has done three or four versions of quantitative easing, a fancy name for buying long-term debt to bring interest rates down. That’s their main tool to try to stimulate the economy. We’ve had 50- and 60-year-low mortgage rates. So it stimulated activity in the mortgage business. On the other hand, you have Fannie (FNMA) and Freddie (FMCC) putting back mortgages to originators that they originated 5 and 10 years ago and saying, you know, the i’s weren’t dotted right and the t’s weren’t crossed quite right.
Those are two diametrically opposed policies. One says lend a bunch of money, and one says don’t lend money. I am not a big fan of quantitative easing this late in the recovery. I think when you have interruptions or distortions in the market, it’s not good. I would like to see rates normalize to be representative of what the economy is doing. And think of the 10,000 Americans who retire every day who have paid an enormous price in this recovery. They’re getting nothing on their money.
Strategically, where are you focused?
If I looked at a couple of businesses where we can jump a curb or two, one is the credit card business. Only about 35 percent or 36 percent of our customers who call us their bank carry our credit card, so we have a big opportunity there. And while we have more than 10 percent of the deposits in the country, we have only a percent or two of the wealth of retirement, brokerage, and trust kinds of activities.
Banks have taken a reputational hit. How do you win back trust?
For people who lost jobs and lost homes and lost businesses—we have to feel for those people. Being one of 11 children, I have family members on every rung of the economic ladder. I don’t need a focus group. I just go to a family reunion. Some players in our industry didn’t do the right thing. They put profits before people. In many cases, banks have a lot of work to do to rebuild the trust of the American people. I don’t think that can be done with an advertising campaign. I think it has to be real person-to-person, street corner by street corner.
Do you think there’s a new normal, a reset in expectations?
Yeah. Look at our return on assets. In the third quarter, for every dollar in loans and deposits—our assets—we made about $1.53 or $1.55 after taxes. That’s right up there with what we did prerecession. On the other hand, our return on equity was 14.07 percent. We used to have a return on equity in the 20 percent range. It’s not that we’re earning less. It’s that we have more capital. So yes, there’s been a reset on the returns because equity is so much higher today. We’re holding so much more of our earning assets in liquid form, and that means we don’t get the same returns on them.
You’re near Silicon Valley. How does technology affect you?
We have lots of deep relationships with the innovators in Silicon Valley. People ask me all the time, “Who is affecting the industry the most?” I say, “Well, in some cases it’s Google (GOOG), Amazon (AMZN), Apple (AAPL).” Today, 80 percent of our retail customers are online, and over half of those are now mobile. So the fact that you can get information or they have technology that helps customers, we need to be just as good or better. In many cases we partner with these folks. In some cases we’re competitors. But this raises the game for all of us. On the other hand, technology does not replace relationships. What our customers tell us is they want technology and to be known by us and valued by us.
Edited and compressed for space.