Our last newsletter highlighted some of the factors that we expect will result in low-to-zero growth for much of the banking industry in 2007. However, as is always the case, top performers can and will confront these obstacles and generate outsized growth.

 

Surviving the tsunami-like factors that may impact the industry next year requires top management to evaluate its major options and create an action plan for growth now.

 

Factors Limiting Growth

At least seven elements will make 2007 a particularly difficult year for most financial services companies:

 

• The flat yield curve

 

• The consumer and commercial customer’s demand for higher rates

 

• A loan pricing squeeze due to more intense bank and non-bank competition

 

• Improved execution by the largest banks

 

• Reduced commercial real estate lending opportunities

 

• Increased provisions

 

• Continued disintermediation by the capital markets

 

So, how can banks proactively sail through what for many could be a perfect storm, resulting in no or negative growth?

 

Achieving Growth in a Non-Growth Environment

Multiple options exist, but most require a level of discipline and consistency that, frankly, many bank managers fail to display.

 

Don’t begin with costs. Too often, bankers fall back on cost reduction as a solution to an earnings crisis. A major cost reduction initiative can become a distraction that pulls people away from and becomes an excuse for not generating growth. Many of the banks that went down the “reengineering” road in the 1990s concentrated on cost reduction, failed to grow, and have since disappeared. Despite its importance, cost reduction can become the refuge of the desperate or uncreative.

 

Exploit the environment to highlight growth. Typically, companies need a crisis to change; well, the banking industry may have one. At a minimum, it should take advantage of an uncertain operating environment to create a climate for change.

 

In particular, public companies need to generate EPS growth or expect a sharp downturn in their share price. While poor performance by peer companies may soften the earnings issue, not all peer companies will underperform, allowing some to position themselves as growth companies rather than “banks.”

 

Evaluate your strategy. Operating in a tougher environment provides the perfect opportunity to review current business strategies (if they exist) and reconsider where the bank should focus in the future. Most banks, even relatively small ones, operate in too many lines of business and/or geographies. Management needs to require line-of-business heads to articulate their strategies and quantify expected performance. The unsettled operating environment offers the optimal time to rethink the various directions in which a bank is heading.

 

Have sales people sell. With some notable exceptions, bank sales people focus on and capture a relatively small percentage of the available sales opportunities, whether from specific client groups or prospects. I have had relationship managers tell me just that –namely, that they are “managers of relationships” and not salespeople.

 

Top management should use this “crisis” to dissect branch manager and banker jobs and shift out those tasks that are non-essential and can be performed as effectively by an administrative or credit specialist. Our view on this topic is hardly new news to anyone who has read previous newsletters. We hope that the willingness to change old approaches is greater now than in recent years.

 

If an employee designated as a sales person is not spending 75 percent or more of his/her time selling, management should demand to know why. It should also install consistent sales management processes to make sure the entire sales organization operates similarly across its footprint. Banks like BofA and Wachovia already appear to be operating that way today, but most others are not. Sales discipline results in sales growth.

 

Rethink branch openings and the branch’s focus. While earlier we downplayed cost reduction, one area that does merit consideration relates to the explosion in branch openings in recent years. Most of the factors negatively impacting bank growth also negatively impact branch profitability; it will become increasingly difficult to justify new branch openings.

 

Many cities now have too many branches searching for a customer group that we believe is increasingly elusive to find and expensive to capture and maintain. Management should evaluate its branch opening strategy, assessing opportunities to shrink branch investment by replacing high-cost facilities with smaller units as well as by better application of alternative sales and service channels. Branches are not going to go away, but their rate of proliferation will drop sharply.

 

Many banks opened branches believing they were valuable sales channels, a great concept. Those banks that are failing to generate the desired level of sale expectations should redouble branch-related efforts, demonstrate success, or close them.

 

Be mean. Too often, bank management is simply too nice. Many banks fail to demand high levels of performance and let mediocre or poor performers off the hook, time and time again. “Be Mean” does not suggest that banks should turn the work environment into a sweat shop; what is does suggest is that a higher level of performance should be insisted upon. Those that fail to measure up should be paid significantly less than those that perform (necessitating significant reliance on incentives to encourage behavior); ultimately, poor performers should be replaced rather than allowed to remain in the payroll until retirement.

 

Buy growth. Consolidation activities should pick up significantly in 2007. Prices for banks failing to grow should drop, making them more attractive as acquisition candidates. Bank with good currency for acquisition will supplement organic growth by buying earnings.

 

Sell. Bank management should consider whether the uncertain economic outlook combined with its bank’s particular capabilities and its own will to fight on leads to the conclusion that sale may be the most attractive option. If so, now is the time to consider the ideal buyer and perhaps approach them. (Alternatively, going private may be an option for smaller banks.)

Declare 2007 a transitional year. If management believes that no matter what actions are taken, 2007 will be a no-growth year, it may be appropriate to admit this to the investment community as early as possible. With that admission, the bank needs to position the year as one in which the bank invests for the future (in technology, personnel, new businesses, etc.) and emerges with a strong platform for growth in 2008. That approach can work if the bank has established credibility and goodwill with the investment community. However, failing to generate the growth as promised can be disastrous.

 

Concluding Thoughts

This newsletter barely scratches the surface of growth-oriented issues that banks need to consider. In recent years, the “living has been [relatively] easy” for many banks, but no more. Versus prior years, we expect 2007 results to show increased disparity between the mediocre and excellent bank performer. Senior management has many options available to it to generate growth; selecting the right ones and demanding their effective execution will be particularly critical.