Bankers and financial advisers may have slightly different perspectives on what 2023 may bring, but taken together, they paint a diverse picture of what could happen with money matters in the new year.
As we enter the new year, banks are adjusting to the historically rapid rise in the Federal Reserve’s key interest rate, said Peter Gwaltney, president and CEO of the N.C. Bankers Association.
That rapid rise, designed to control inflation, “has created many challenges for banks in terms of deposit pricing, loan pricing, liquidity management and managing their net interest margins,” he said in December. “We were not thinking about these issues six months ago, but that’s where we are at year’s end and anticipating what the new year will hold.”
Earlier in 2022, Gwaltney added, banks were “flush with deposits, but now deposits are flowing out. Banks are having to work hard to reprice their CDs and other deposit [products] to enable [banks] to fund their loan demand. Loan demand is still strong because of North Carolina’s healthy economy.”
The rise in interest rates is a two-edged sword, of course. While banks can charge more in interest, they also must pay more for their customers’ deposits. In the past six months, said Gwaltney, bank deposits look much more attractive to customers when compared to riskier investments such as equities.
“Everybody’s in the same boat,” he said, adding that banks of all sizes are trying to do what’s right for their own strategies, customers and bottom lines. “I don’t think it matters what type of bank we’re talking about. Community banks have relationships they can call on and their local marketing efforts can bring in the deposits they need. Large banks have broader resources.”
There were signs at the end of 2022 that the Fed’s rate hikes might be slowing, Gwaltney noted, pointing to its increase of 50 basis points rather than 75 in December.
“We anticipate another rate increase, but [the Fed] is rapidly approaching its target of between 7.5% and 5%. Another rise of 50 basis points gets us to that target; that will happen sometime in the first quarter of 2023. The economy in general will appreciate a leveling off; a less-volatile environment. With inflation leveling off, with the Fed funds rate hitting the target and leveling off, people can say ‘I know what the rules of the game are. Now I can plan.’”
An increased sense of certainty should be reflected in a less-volatile stock market as well but settling into the neighborhood of new rates will still take some time.
“The new year will bring new issues, and we’ll see what those are when they get here,” Gwaltney said. “We will still be adjusting to the new rate environment; the changes happened so fast it will take time to adjust to the new normal. But the North Carolina economy will continue to be strong and grow; that’s not a concern.”
Gwaltney doesn’t see the new year bringing changes to the banking industry in the Cape Fear region.
“Banks will continue to serve the area, invest in the area and be the economic engine for the area,” he said, adding that banks from elsewhere will still target the region because of its growth and economic promise. He cited the 2021 decision of Reading, Pennsylvania-based Customers Bank to locate its first Carolinas branch in Wilmington and the recent arrival of Paragon Bank, planting its first North Carolina location in the Port City. Paragon is based in Memphis, Tennessee.
In both cases, Gwaltney said, these new-to-Wilmington banks hired experienced local bankers with significant local relationships. Paragon’s seven-person Wilmington staff was formerly with Select Bank, which was acquired in 2021 by Southern Pines-based First Bank.
While de novo bank openings have slowed significantly since before the pandemic, Gwaltney added, these days, banks look to grow by acquiring existing bank companies in their target areas. First Bank’s purchase of Select Bank, United Community Bank’s acquisition of Aquesta Bank and FNB’s very recent purchase of Union Bank are examples.
“We have 87 banks doing business in our state,” Gwaltney said. “By the first quarter of 2023, only 41 will be chartered in North Carolina. It’s odd having half of the banks in the state headquartered outside the state. I expect banks within the state that want to grow and out-of-state banks that want to grow will continue to acquire North Carolina-based banks.”
The upcoming divided Congress will, he said, “tap the brakes on legislation that reaches the president’s desk. It will have to be bipartisan, and that’s a good thing for our industry.”
Choppier waters are in the forecast for investors, according to a report, “2023 Outlook: Recession, Recovery, and Rebound,” published by Wells Fargo Investment Institute (WFII) last month. Its authors predict a recession in the first half of 2023, recovery in midyear and “a rebound that gains strength into year-end.”
The report looks closely at three key drivers: inflation, interest rates and corporate earnings. WFII believes that the decline of inflation will be a dominant theme in 2023, shaping the trajectory of economic growth and interest rates. Highlights of WFII’s forecast include:
• a possible inflation decline to under 3% on a year-over-year basis by the end of 2023, thanks to the recession and the “unwinding of inflationary shocks of the past 18 months;”
• a moderate recession in the first half of 2023 possibly leading to contraction for the year, marked by slight negative GDP growth in the U.S.;
• an S&P 500 Index gain once investors begin to anticipate economic and earnings recovery. Wells Fargo analysts forecast an S&P 500 Index target range by year’s end between 4,300 and 4,500; and
• a Federal funds rate forecast of 3.50% – 3.75% due to multiple policy interest-rate reductions after rates reach a peak above 4.50% early in 2023.
“The unfavorable risk-reward balance in both equities and fixed income jolted portfolio performance in 2022 and tilted our guidance more defensively for most of the year,” Darrell Cronk, chief investment officer for Wells Fargo Wealth & Investment Management, stated when the report was released. “And while we expect an economic recovery after midyear, we anticipate 2023 will be a volatile and challenging year for investors as we transition from a recession to a recovery, yet we believe that it may create strong opportunities to reposition for growth and back into a more pro-risk stance as the next economic recovery and bull market emerges.”