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Role of banks during the pandemic and recovery

December 15, 2021

In the early days of the Covid-19 pandemic, the banking industry faced great challenges when the economy came to an abrupt stop. However, banks have weathered the pandemic well so far, and proven their value and contribution to the economy and society by ensuring ongoing funding to businesses and households. Unlike previous economic crises, banks’ profitability held up well. The largest lenders in the United States being JP Morgan Chase, Bank of America, Wells Fargo, Citigroup, and Morgan Stanley, have all beaten earnings expectations in the latest quarter and expect continuing economic rebound from the pandemic, despite many challenges the world is still facing.

While large banks help keep financial markets moving and support large company debt, the thousands of community and regional banks are a crucial source of funding for families and small businesses in the U.S. Small businesses are key to the U.S. economy, representing the vast majority of all businesses, and employing almost half of the private sector workforce. As of the end of 2019, the U.S. had 4,750 community banks with more than 29,000 branches throughout the country. Together, they represent 15% of the banking industry’s total loans, but make 36% of all small business loans and 70% of all agricultural loans, according to the FDIC’s 2020 Community Banking Study.

Many big and profitable companies obtained loans from the Paycheck Protection Program (PPP), which was intended to help small businesses keep employees on their payroll. Yet, many small businesses were let down by large banks’ slow responses and complicated application processes. Community and regional banks, on the other hand, responded quickly and proactively. In the first round of the PPP, community banks processed 60% of the program’s funding. Even after the large banks began to participate in the second round, community banks still accounted for 45% of the funding. As a result, many community and regional banks have fortified their relationships with clients and gained new customers during the pandemic.

Wintrust Financial Corporation (WTFC US)

Wintrust Financial Corporation (a holding in our portfolios), has over 150 Wintrust Community Bank locations, primarily in the Chicago metropolitan area, southern Wisconsin, and northwest Indiana through its 15 community bank subsidiaries. The company was founded in 1991 by current CEO Edward J. Wehmer, with the goal to provide an alternative to big banks. Over the years, they stayed true to their mission. In 2020, less than a week after the launch of the PPP, Wintrust built a customer-facing loan inquiry system, and created a new underwriting process to meet businesses’ needs. In the first week, the company took in 7,700 inquiries for $3.1 billion worth of loans. By the end of June 2021, it funded over 19,400 PPP loans for $4.8 billion. Despite the global pandemic, Wintrust had their record growth in 2020, total assets increased by 23% compared to 2019, and total loans increased by 20%. The bank’s consistent and conservative approach to credit and liquidity helped the company remain resilient during the tough times, and the nonperforming loan ratio actually improved to 0.4% in 2020, from 0.44% in 2019.

UMB Financial Corporation (UMBF US)

We also own UMB Financial Corporation in our portfolios. Headquartered in Kansas City, Missouri, UMBF offers commercial, personal, and institutional banking. Regional banking accounts for 37% of its total deposits. Its loan mix is more diversified than peers, across commercial & industrial, commercial real estate, residential real estate, and others. In 2020, its total loans increased by 10.4%, much faster than peer median loan growth of 2%. During the pandemic, the company works actively with customers by offering payment deferrals and loan modifications. The company also recorded over 5,000 loans totaling $1.5 billion under the PPP. Nonperforming loan ratio remained low at 0.55%, below peer average of 0.79%. With over 50% of its loans being variable, UMBF is well positioned to benefit from the eventual rate hikes projected in 2022.  

A major trend accelerated by the pandemic is the adoption of digital banking. As a result, the industry has seen an accelerated number of bank branch closures. In the U.S., there were 2,284 net closures in 2020, up from 1,391 in 2019, leaving the total number of branches to 74,928. In the United Kingdom (UK), 368 branches were shut down in 2020. 736 bank branches have closed permanently so far in 2021, and another 220 are already planned for 2022. The situation is no different in Japan. Mitsubishi UFJ Financial Group, Inc. (MUFG), the country’s largest lender by assets, plans to close 40% of its domestic branches by 2023 to cut costs. With the declining number of branches, ATMs have become an even more important touch point with end users. To improve operational efficiency, banks are increasingly sharing their ATM infrastructure or outsourcing the ATM operations.

Seven Bank (8410 JP)

Seven Bank (a holding in our portfolios), an ATM bank, is a beneficiary of this trend. It has the largest ATM network in Japan, with over 25,000 ATMs installed across the country. It also has over 9,000 ATMs in the U.S., 1,400 ATMs in Indonesia and close to 700 in the Philippines. With respect to ATMs, people may simply think of cash deposits or withdraws as transactions, as commonly seen in North America. However, Seven Bank ATM is a lot more than that. The company is upgrading all of its ATMs to the fourth generation, which incorporates advancements in biometrics, artificial intelligence (AI), Internet of Things (IoT), and other technologies. The next-generation ATM is capable of face recognition for identity verification, settlement with QR codes, optimized operations through AI and IoT, and there is a 40% decrease in electricity usage and CO2 emissions. Seven Bank is also partnering with banks and non-bank institutions to provide financial services, including topping up e-money cards, international money transfers, refund issuances, bill payments, advancing wages, and much more. For example, during the pandemic, many musical and sports events were cancelled, and customers were able to get a refund through Seven Bank’s ATMs; residents in Japan were also able to get Covid-19 cash handout from the government through these ATMs. With the digitalization of the economy, ATMs are not becoming obsolete, but proving to be indispensable.

As this will be our last weekly commentary of the year, we would like to thank you for your continued support, and wish you a joyful and prosperous 2022.

Happy Holidays!

The Global Alpha team

Global Alpha Capital Management Ltd.
December 15th, 2021