Of the many issues facing financial services companies in 2011, perhaps none is more critical than revenue generation. The scarcity of lending opportunities, created by a lack of demand, fewer creditworthy borrowers, and other factors is an enormous problem for the industry. The ratio of loans to deposits for the industry has dropped from a high of 93% at year-end 2005 to 78% as of June 30, 2010.
Mortgages, home equity loans, and HELOCs - previously a primary source of earnings for many companies - are likely to be sources of headaches in 2011. The MBA projects that first mortgage origination volumes will drop to $1 trillion in 2011, or nearly one-third of peak volumes seen in 2005. In addition, these products are expected to remain under heavy regulatory scrutiny as the CFPB kicks into full gear. Commercial lending is also currently stagnant. Demand for credit remains depresses, particularly among small businesses. According to a September 2010 survey by the NFIB, 91% of small business owners reported that their credit needs were met, or that they did not have interest in borrowing.
The American Banker reported last week (subscription required) that many institutions are now turning to unsecured personal loans and lines of credit to generate interest income. Consumers are increasingly using these loans as a replacement for HELOCs or credit cards - in part because there is little or no home equity against which to borrow in most markets around the country and credit card debt if being paid down as comsumers work to improve their financial situations. For creditworthy consumers wishing to borrow to finance major expenditures (college or private school tuition) or lifestyle purchases (boats or RVs), unsecured credit may be the way to go. Few banks compete today in this arena, but that is likely to change.
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