Earnings Remains a Good Source of Capital - Just Ask the Analysts

Recent reports indicate that bank analysts, along with many other interested parties, will be watching closely the ability of banks to generate sources of fresh capital in 2009. It is understood that due to the large provisions made to the loan loss reserve in the fourth quarter of 2008 that capital ratios will be understandably lower. Analysts have indicated that they will now be watching these ratios to see which organizations will be able to increase capital, and more importantly what is the source of the capital increase. Basically they will be looking to see which organizations have the ability to generate sustainable sources of capital increases.

Retained earnings continues to be a great source of capital; therefore many organizations will once again begin looking to all lines of business for both increases in top-line and bottom-line revenue. Until the credit and liquidity issues are addressed, non-interest income generators will be called upon to assist in delivering increased revenue results. As with any business venture, various risks must be undertaken to produce results. As a professional within the financial services industry, you must ask the following question: Are we generating optimal risk adjusted revenue for the service we provide?

Interesting Conundrum - Increased Regulation and Expense Reductions

As the turbulence continues within the financial services industry, compliance challenges are being created.

• Federal and state regulatory agencies are looking to increase their regulatory influence and the examination process is expected to become more onerous.
• Financial organizations are closely watching their expenses, especially in areas that are not revenue producing (i.e., operations).
  

These opposing views will definitely create some unique challenges for both the regulators and the financial industry. The goal is to create a solution that restores confidence, credibility, and growth within the industry.

• Regulatory red flags will be generated when financial institutions decrease compliance budgets; eliminate staff; reduce training; decrease technology usage, etc.
• Shareholder and analysts concerns will be brought to light when budgets are missed; revenue expectations are adjusted downward; increased losses; etc.

Currently there is plenty of finger pointing regarding the state of the industry. Both sides will need to work together to provide proper regulatory oversight that allows for renewed growth.

401(k) Investments Changing the Retirement Market

According to the U.S. Census Bureau, nearly 8,000 Americans are turning 65 each day, and therefore adding to the number of individuals that need to rely upon retirement savings plans for their source of funds. For years investment professionals have assisted in providing vehicles to save for retirement, one such vehicle being the defined contribution plan, predominately the 401(k). Over the past twelve months, a large percentage of these self-directed plans have experienced a significant decline in value – thus creating a very uncertain time for many of those approaching or contemplating retirement. Uncertainty creates opportunity and in this case insurance companies are rushing to offer annuities for the 401(k) channel.

While the amounts and numbers entering the 401(k) annuity market are unknown, this does seem to be an opportune time for the insurance companies to re-introduce the annuity product to plan sponsors. While there remain some shortcomings to this product, including the fact that not all plan participants would benefit from such a product, interest is growing and therefore will become another option for plan sponsors and participants. To offer a proactive solution to your plan sponsor clients, you should be aware of these annuity offerings and their impact on the business.

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