For Pot Companies, Bankers Are a Buzzkill
Bankers seem to be taking to heart the old anti-drug slogan, “Just say no.”
According to federal government statistics released last week, the number of financial institutions servicing the marijuana industry declined again in the most recently reported period. This trend puts further pressure on thinly capitalized cannabis companies and provides another competitive advantage for the larger-cap players. The “green rush” is hard-up for green.
The Financial Crimes Enforcement Network (FinCEN) reported last week that 695 banks and credit unions were working with state-legal cannabis businesses as of the end of June, down from 717 in the same month a year ago and down from 705 in the previous month. The latest number doesn’t represent a huge fall-off but it nonetheless confirms a prolonged downward trend, following a peak in November 2019 (see chart).
What accounts for the waning number of banks that lend to marijuana businesses? FinCEN, which is part of the U.S. Treasury Department, stated in its report: “The COVID-19 pandemic may be adding to this apparent decline,” noting that many marijuana companies “have likely been closed during this time period, due to government imposed quarantine restrictions.” If that’s the case, it would be a hopeful sign because the decline would largely represent a temporary anomaly.
The deteriorating pace of marijuana lending flies in the face of a surge in marijuana sales due to COVID-19, as several states and localities designate weed companies as “essential services” amid the pandemic. It also seems counter-intuitive that bankers would tighten the spigot as a growing number of states lift restrictions against marijuana.
MORE and SAFE…
But let’s face it, bankers are notoriously conservative and marijuana remains illegal at the federal level. Who wants Uncle Sam knocking at their door for some unforeseen reason? Financial institutions may be waiting for Congress to act on marijuana decriminalization. They could be on the verge of getting their wish. A vote on a bill to federally decriminalize marijuana will take place in about two weeks in the U.S. House.
Now that the Labor Day holiday is behind us and Congress has returned from recess, the September docket for the House will include a vote on the Marijuana Opportunity, Reinvestment and Expungement (MORE) Act, which is scheduled to reach the floor of that chamber during the week of September 21.
MORE is a comprehensive federal cannabis bill and its passage would provide a major positive catalyst for marijuana stocks. The legislative package was introduced last year by House Judiciary Committee Chairman Jerrold Nadler (D-NY) and has cleared his panel.
MORE would federally deschedule cannabis and expunge the records of previous marijuana convictions. MORE also would impose a 5% tax on cannabis sales; expedite resentencing for people imprisoned for marijuana offenses; protect immigrants from being denied citizenship because of cannabis; and prevent federal agencies from blocking public benefits or security clearances due to the use of weed.
The MORE bill faces an uncertain future in the Senate but signs are emerging that GOP Senate Leader Mitch McConnell (R-KY) is rethinking his opposition. The Senate has become a graveyard for bills that emerge from the House, but billions of dollars are at stake with the marijuana industry and if McConnell is anything, he’s pro-business.
The House has been the most marijuana friendly chamber, especially when it comes to the nexus of pot and banking. The standalone Secure and Fair Enforcement (SAFE) Banking Act cleared the House last year but currently languishes in the Senate Banking Committee.
SAFE would help mitigate the marijuana industry’s cash woes, by allowing pot companies freer access to financial services. Without access to banking, marijuana businesses not only lack loans but also the ability to process credit card payments, deposit cash, write checks to suppliers, and other vital functions.
SAFE also would undercut the growing black market in marijuana sales and improve the industry’s financial transparency in legal cannabis states.
The need for banking reform in regards to marijuana is imperative. As financial lending levels off, many marijuana companies are having difficulty in executing their strategic plans for lack of cash.
Fewer and fewer marijuana companies have sufficient cash on hand to survive more than six months when capital expenditures and cash flow burn are taken into account. But if either MORE or SAFE get enacted into law, you can expect a surge in bank lending to marijuana companies, which in turn would ignite a powerful rally in pot stocks.
The time to buy quality marijuana stocks is before these legislative milestones are achieved. The Wall Street adage “buy on the rumor” especially applies to the marijuana sector.
After months of research, we’ve pinpointed solid cannabis investments with the strongest balance sheets and greatest profit potential. Click here for our report on the best pot stocks.
John Persinos is the editor-in-chief of Marijuana Investing Daily.