Writer: Max Crampton-Thomas
2 min read August 2021 — Rob McCabe, chairman of Pinnacle Financial Partners, is optimistic about the banking business over the next two years. In an interview with Invest:, he mentioned that he is only worried about two things: low interest rates, which he would like to see go up a little, and the excess of government spending that could lead to something nobody wants, more taxes.
What is the state of the market for banking and financial services and what are some of the opportunities and challenges?
Demand is coming back in all sectors: commercial, industrial, consumer and commercial real estate. There is strong demand and I think we’re getting very close to businesses as usual. Going into COVID, many banks felt they were going to experience significant loan losses as companies didn’t have the revenue to make payments and other financial obligations, so we all issued capital, primarily preferred stock, and took big reserves out of our earnings in anticipation of credit problems. But the losses haven’t materialized. Our credit losses and our at-risk credits are as slow or lower than they were pre-pandemic.
Is the market back to pre-pandemic 2019 levels of activity?
There’s still a little work to do in real estate. We’re watching vacancy rates and there’s been a lot of products delivered in all these different asset classes and vacancy rates are high. They were elevated before the pandemic, so we have some absorption to do. On the commercial industrial side, people have been awash with cash primarily because of PPP loans. Their sales volumes were lower, therefore, they didn’t have money tied to inventory or accounts receivable and they weren’t spending money on capital expenditures. I think they’re burning through that liquidity and they’re becoming more optimistic.
On the downside though is that we had this recovery, which has sparked economic activity that is not back to pre-pandemic levels but still robust, and the economic forecast is that it will slow down. I think we’ll have growth but the belief is that it will slow down in 4Q21. The absolute level of growth available for the banks to meet the demand is uncertain at this point but it has made the turn in economic activity.
Are you anticipating a market correction or just a gradual slowdown?
I don’t think we’re expecting any correction. We have a very client-centric operation. We know exactly who we’re dealing with and we don’t get overexposed. Our vacancy factors are higher Downtown because people have been working from home. Suburban properties are outperforming urban properties coming out of the pandemic. Much of the current increasing vacancy is due to the high number of deliveries that were conceived three or four years ago that are now being finished and delivered. Right now, we like build-to-suit and substantially lease office properties, pre-leased office properties. We think retail is strong. We like single-tenant strip retail grocery-anchored properties. We expect demand for that to continue. We are a little more cautious in multifamily. There’s a lot of products out in the market and we will be less aggressive in multifamily.
What might be the potential impacts from possible changes in taxes?
Biden has talked about raising capital gains tax. Anybody making over a million dollars could see a hike in personal income tax rates and then Medicare, Medicaid tax on top of that. Here in Tennessee, there is no state income tax, and many people move here because of our tax situation. If you’re in California, you’ve got a 9% to 11% additional personal income tax. We are very attractive to national companies like Amazon and Oracle and to people who want to escape California or Washington State. We do have an advantage tax-wise.
How is Pinnacle Financial navigating the low-interest environment?
Our spreads have been stable. They’ve been narrower than we’re accustomed to historically, but they’re still solid. In the absence of loan losses, we’re able to take most of that margin to the bottom line but we would like to see rates increase. A lot of projects and real estate deals are being artificially supported by low-interest rates from hedge funds and private equity companies so if interest rates rise, a number of those projects will be under more scrutiny in terms of quality. The yield curve is flat and we’d like to see it move up. We would like to see the federal government taper purchases of securities so that the rates will rise. We don’t know when that will occur. If inflation proved to be a little more permanent, a little more punitive than people are saying at the policy level, that could cause interest rates to rise, which would help us.
What unique aspects of the Tennessee region are important for businesses?
People are attracted to our tax structure, quality of life, our infrastructure and the available workforce. I think we’ve got strong business and political leadership; the state works exceptionally well in terms of economic development. We get good regional cooperation and coordination. The real pressure here is going to be on housing, where you have more people moving here than you have available homes. That is pushing up prices. We have a lot of essential infrastructure work to do, and we need to watch our housing market.
For more information, visit: https://www.pnfp.com/