President and CEO, Mr. Chang M. Liu, took part in the L.A. Times panel to discuss the economic forecast and business predictions for 2023. You may view the complete article here.
Everyone is used to the hybrid workplace model but it has resulted in big changes for employers and employees. It’s been a challenge to fill hourly-paid positions when potential candidates have different alternatives across industries that offer the same hourly rate. Employers have been thrown a curve by the shift of bargaining power to employees and must remain flexible in order to recruit the necessary talent. In order for the hybrid model to move forward, management needs to evaluate how it affects team members’ work momentum and what can be gained or lost in this new work environment, e.g., loss of ideas that gets generated through daily face-to-face interactions, higher turnover with new employees who do not feel fully integrated with the team, expansion of the pool of candidates by taking a long commute out of the equation.
I think 2023 will likely see flat or low single-digit growth in loan demand for most banks. The primary driving force for this will be higher interest rates, higher cap rates and tighter credit underwriting. We will likely see some cracks in the industry’s current loan portfolios depending on the strength of the sponsors. We see potential problems with the general office market, especially in the Central Business Districts. Tighter underwriting for all commercial and trade finance clients is likely as businesses have inventory buildup that may not necessarily translate to higher revenue growth.
Now that the zero-COVID policy has been lifted and despite rapid increases in COVID cases, factories in China have since been reopened and productions are ramping up despite rapid increases in COVID cases. The cost per container has already decreased and I think it will continue to come down. This may translate to more supply, and coupled with a higher price per unit, it may lead to reduced demand and flattening prices. It is a positive trend that we are moving in the direction of seeing more manufacturing here in the U.S.
The commercial real estate market is experiencing some refinance risk since the five-year Treasury rate is 220 basis points higher than it was three years ago. Plus, I think the cap rate will catch up to interest rates as they continue to rise, and that will bring values down resulting in lower debt amount that can be financed. Owners who have liquidity will be fine, but those who don’t could face problems. Our bank has made a strategic decision not to originate much commercial real estate business collateralized by general office buildings for the past few years as the outlook for the general office segment continues to be a concern, given the change in the working environment as most industries had to adapt to both work-from-home or hybrid work schedules. Class A space may fare reasonably well but some Class B and C space may be repurposed. I also see a slow period for construction loans and new development based on today’s higher floating interest rates.
I think it has caused businesses to become even more technology driven. Banking has always been paper-heavy and our experience during the pandemic taught us to be more digital — we had to evolve to continue to do business since our workforce was more mobile and that has continued post-pandemic. We have enhanced digital account availability to appeal to a younger generation and provide added convenience to our long-term clients. I don’t see branch banking ever going away but I must admit that when opportunities come up to move into a new area, I now ask myself if we need a brick-and-mortar location versus if the same business can be gained through the use of technology.
First, I would recommend they have a unique competitive business model — it’s not viable to simply be another version of something that already exists. They must have a product or service that is different and not easily replicated. Second, I would suggest they focus on cash flow. Many companies, especially those in the technology space, focus on revenue growth or eyeballs per click rather than the bottom line. They think if they are able to keep increasing the top-line revenue for their investors that’s all that matters but it is tremendously important for them to generate a positive cash flow that reduces cash burn so that they can build a sustainable business model.
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