As a leading authority and 25-year veteran of the investment and commercial banking sectors, Dave Kucera, head of Capital One’s Financial Institutions Group, sat with TSL Express’ senior editor to discuss best practices for managing market cycles. Including the commercial banking trends to watch out for in 2023 and key steps financial institutions can take to better navigate the current economic landscape. 

Dave Kucera joined Capital One in 2013. Capital One is one of the seven largest banks in the U.S. with over $450 billion in assets. In 2015 he became head of the newly formed Financial Institutions Group. Dave also serves as the Chicago market president for Capital One. Capital One’s Financial Institutions Group provides recourse and non-recourse financing, securitization, capital markets fund raising, advisory, and other services to companies involved in financial services and asset management throughout the U.S. across a broad range of sectors. Dave is a frequent speaker, is active in a number of industry groups, and has been a board member of several of the organizations for which he has worked. Prior to joining Capital One, Dave led and co-founded the U.S. Securitization Group at BMO Capital Markets, which provided and served as agent for over $100 billion in corporate and structured credit services, investment banking, and a wide range of advisory and other services for a wide range of U.S. and international clients. Dave has a B.A. in finance from Marquette University and a master’s in management from the Kellogg School at Northwestern University. He completed an Organizational Leadership Program at the University of California, Berkeley and an Advanced Leadership Program at the University of Toronto Rotman School of Business. Dave is a member of the Economic Club of Chicago and the Executives Club of Chicago. He is a board member of SFA, a thought leadership and advocacy organization for the structured finance industry, and HFS Scholars, a mentoring and scholarship organization that supports high school students and their families in the Chicagoland area. He is also a board member of Marquette University’s Fintech and Commercial Banking groups.

TSL:  When looking back at 2022 from a commercial banking perspective, what trends stand out? What surprised you?

Dave Kucera: The last few years have been really interesting.  In 2022, we saw the continued momentum that 2021 generated. We saw a lot of activity during the first half of the year across a broad range of most of our sectors. 

The second half of the year was a changing tune. I think some of those influences started during the first half of the year. Inflation had already been an issue in 2021 and into early 2022. But it lasted longer and it's the highest it's ever been in 40 years. The impact of that started to show up more dramatically during the second half of last year. The Federal Reserve and many of the global central banks raised interest rates. So, in the first half of the year the total M&A activity, of what Capital One tracked, was especially active, both strategically and tactically, and was the second highest on record in the U.S. for the entire year. The second half of the year was a lot less active than the first. I think one of the key themes was rising uncertainty and that has carried over into where we are today. We're certainly hearing that from our clients, the markets and it’s in the data we track. There’s still activity going on, and commerce happening, and companies are transacting and raising capital, but the second half of the year, in particular, was a much different environment than what we started the year with.

TSL: Now that we're in 2023, what are some areas that banks and commercial lenders should be wary of? 

Kucera: I'm an optimist at heart. I tend to start with a lens that looks at opportunities out there. But I think the overall theme is uncertainty as much as anything. We're in as uncertain a market as we've seen in decades, whether it's the impact of rising inflation, or the rising cost of capital or geopolitical issues, which have been centered in Europe, but aren't centered just in Europe. All of this uncertainty is leading to some hesitancy. You've seen companies less willing to make strategic decisions. I think because the crystal ball is less clear, when you're less certain about what the future is going to look like near and longer term, you're less willing to make big strategic bets or, in some cases, if part of what you're trying to evaluate is your costs and availability of capital, and that is not as certain, you're going to pause. I think we're seeing companies are stepping back and reassessing and evaluating the challenges and opportunities that are out there in the market. For business owners, ask what are the moats that you have in your business? What are the challenges that you know about and the ones you may not? That's what we're spending time talking to and advising our clients about. 

TSL: How are rising interest rates affecting originations?

Kucera: For some lenders, rising rates are partly a good thing, especially if your cost of lending is on a floating rate basis. If you're charging a floating rate, and that floating rate has risen, you're getting more revenue and you're able to charge more for the capital you are providing. The other side of that coin is you have to raise that money somehow. If that cost of capital is floating as well on the funding side, what can be charged and the cost of the capital have both changed. That's more from a lender perspective. I think if you stepped back more broadly, rising rates mean the cost of capital is higher in the system. That means any company that's looking at a project to invest in, or maybe buy a company or a division, or consider certain expansions, or operating its core business, the cost of doing that with borrowed money, has gone up. So that's an impact that many companies are assessing. Many management teams either don't have that experience or the experience they have is quite dusty. So, they're having to dust off the toolkit. Rates rose very quickly, so business will have to ask what the implications are from that and if they are ready for it. Can the business bear that higher cost of capital? What other options might be out there? And is that marginal investment that they were thinking about doing to grow a business or a division or expand make sense to do when the cost of capital is higher? So, I think you're seeing the cost of capital through higher interest rates ripple through lots of companies and corporate finance decisions. We haven't yet seen a lot of evidence that the cost of capital can mean higher risk. So, for borrowers that are having to bear a higher burden, whether it's companies or individuals, the cost of that burden in the way of managing through it can be harder than it used to be when rates were lower, and probably less volatile. I think we're in the early stages and we’re still understanding the longer term implications of it, but it is starting to ripple up and it's much more of a topic that we're talking to our clients about, including if they should consider hedging strategies or other strategies other than managing interest rate risk that was less likely to be on their priority list than it was 12 months ago.

TSL: Are there any additional steps banks can take to continue to prepare for future uncertainty and disruption? How can they better prepare for change?

We've gone through a lot of change in the last 36 months. One example to illustrate is we have an NBFI client who has been active in the markets for a long time. They were looking to make an acquisition at the beginning of the pandemic. They asked us about it, given that we had been one of their capital partners for a long time. Ultimately, they decided not to make that acquisition. But through that we got into a deeper, strategic discussion of what they wanted to be when they grew up, what their core moats were and where their focus was as a business and where they wanted to take the business short and long term. Later on, they got an opportunity to take a fresh look at their capital structure. So, we helped them evaluate their senior capital, junior capital, the equity that they had in the business and gave them some recommendations and reduced their cost of capital at the beginning of the pandemic, which really helped them ride through the pandemic pretty well. We caught up with them again and stayed in touch with them through the course of last year and gave them some ideas on raising additional capital just in case they wanted it or needed it or to be flexible. This helped take them to the market. While there was money available, I think at that time they didn't get the terms that they thought made sense and decided to stop marketing and pull the offering. But we did keep watching the market. A few weeks later, we thought there was a window to raise some money, probably a little less than what they initially hoped, but at a total cost that they thought was helpful. The benefit of potentially getting that done was it would give them additional flexibility as they looked into this year and beyond. So, we ended up going back to the market and raising some money for them. They got it done with our help, with a little less money than I think they had initially hoped to raise. 

I think the key theme if I had to step back and apply it more broadly, is companies would do well to expect the unexpected. Certainly, we've seen as much volatility during the last 36 months as we've seen over the last few decades in some respect. While history does rhyme, it often doesn't repeat. So, there are lessons we can learn from looking back at history, but every cycle usually has its nuances. I think this one does as well. One of the things we're hearing more from the market, and from our clients, and we're trying to do it ourselves, is using data to continually assess business, teams, customers, and opportunities is increasingly important.

Clients are expecting deep industry specialization from their banking partners, and it's our responsibility to have a deep, nuanced, insights-informed view of each sector we serve. This approach empowers us to truly help clients make decisions that will help them reach their optimal outcomes.

TSL: What are some common themes you are noticing among CapitalOne clients? 

Kucera: The one theme we see is that the companies that often do best have a plan and they put that plan in place. They make sure that they communicate that plan throughout the organization. It’s not just the management team that has it, but the team that's implementing it, the board and other stakeholders also have it. Getting back to data, continuing to assess what's going on around you and using analytics and data to derive modifications, and being willing to pivot from a plan. So that's a theme that we're spending a lot of time hearing and talking about and leaning in to talk to our clients. We think this is a good opportunity to lean in and talk to all of our stakeholders more because they have as many questions, if not more, as we do. It gives us an opportunity to have a deeper conversation than we might have had previously.