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By David White
Regional Banks have been doing well recently. The Fed has taken a big role in this by strongly supporting the US real estate markets. The Fed’s recently finished Operation Twist did a lot to lower long term US Treasury Bond yields. Many mortgage loan rates are based on these rates. Currently the Fed has QE3 ($40B/month in MBS buying) and QE4 ($45B/month in long term Treasury Bond buying) on going. These two programs are helping to keep both Treasury Bond Yields and mortgage rates low. Low rates make real estate more affordable. They also expand the number of people or businesses that can qualify for loans under the new, stricter standards. Plus the cost of money for banks is very cheap, due in part to the currently low Fed rates. First Merit (FMER), a regional Ohio based bank, benefits from this every business day.
Ohio has an added advantage. The new unconventional Utica oil and gas field is drawing a lot of development monies. Companies have spent and continue to spend huge amounts on leaseholds. These same companies are spending on goods and services to supply their drilling/development operations. The development companies are spending a considerable amount to live in Ohio. For instance, some are buying houses (and everything else). There is the economic multiplier effect. This includes such things as the extra grocery store employees needed to service all the new oil well workers.
Ohio’s GDP is forecast to be about $531.2B in 2013, which is a large increase from its $418.9B GDP in 2011. The billions of dollars in spending on the Utica is a big part of Ohio’s re-invigorated GDP growth. Ohio’s unemployment rate for November 2012 was 6.8% versus the US wide rate of 7.8%. The 1% lower unemployment rate correlates well with the extra monies from Utica development. Unemployment in Ohio may fall further as those development activities expand. Lower unemployment and higher GDP growth mean that loans banks make (and have previously made) will be more likely to be profitable. It means that banks should get both more consumer and commercial business. This is an advantage top Ohio banks have over most other regional banks in the US.
Additionally, Utica development is a long term advantage, not just a momentary push upward. The eventual huge oil and gas sales from the new wells will add still more to that advantage. Ohio’s real estate market was never as over inflated as those along the coasts and others. Therefore Ohio banks should be in much better financial condition than those in most other states.