After several years of watching most banks report steadily rising income, with share prices rising to match, maybe a splash of cold water is good.
Such a warning was issued by Lawrence W. Cohn, an analyst with New Jersey-based Ryan Beck & Co., in his recent article "The Losers Game."
After a meeting with Bank of America executives, Mr. Cohn reported that the attending analysts were struck by how little of its expected returns are dependent on new-growth initiatives. "The company seems to be focused on the blocking and tackling of the business," emphasizing risk management rather than developing new income streams, he wrote.
"We think that BofA may have it right," Mr. Cohn wrote. "The more boring the story, probably the better the stock."
While "adventuresome investments and aggressive growth stories are a lot more fun ... the risks of these approaches rise appreciably the later we are in the cycle," Mr. Cohn concluded.
That is why Mr. Cohn calls banking today a "losers game in which the idea is less not so much to win as it is not to lose ... Successful participants in a losers game tend to be awfully boring, but the alternative can be a whole lot worse."
Today's community banks-both traditional ones and thrifts that survived and converted-can say "amen" to BofA's approach and the analysts' interpretation.
Many of the executives of banks and thrifts thriving today were around during the halcyon days before the S&L collapse of the late 1980s. They had to bear the taunts of analysts, investors, and other observers that they were "old fogies" for not taking advantage of the opportunities in the changing world of finance that REITs, broadened powers, and regulatory accounting principles (an ingenious fiction) brought us.
Many others followed the leaders over the cliff of aggressive growth. But most of the survivors took caution. And it was tougher on community banks than on the larger ones; for the "too-big-to-fail" attitude helped some notable giants survive with supervisory moderation, while smaller banks in similar trouble were allowed to go down with the ship.
So the survivors who recognize that this is a time for caution can say "amen." Yet they also realize that this is not an easy decision to make when there are so many new possibilities for consumer service with the easing of investing and insurance legislation and regulations.
It takes a lot of willpower to let opportunities to offer mutual funds, insurance, paperless banking, and the like slide by when they finally can be offered after years of waiting and discussion.
But here is one place where community banks have an advantage over larger rivals. Because few people expect community banks to be in the forefront of change, they can respect the smaller bank that takes a defensive attitude or service.
And what we so often forget is that to most Americans a safe depository that pays a decent interest rate, has a lending policy that yields quick answers, and offers hassle-free banking with few errors and quick correction of those that do take place is really far more important than mutual fund offerings, insurance, and the opportunity to bank through the Internet.
If this weren't true, how could you explain the founding and thriving of so many de novo banks today?
For as Lawrence Cohn put it, it's better to be boring than exciting in a losers game. And some of the best community banks just pick 'em up and put 'em down, but survive.
