Executive Summary: Bankers and their managers are particularly skilled at making excuses that result in inaction. The current environment has to operate as a “No Excuses Zone” in which senior management demands both immediate and long-term focus on the handful of areas that will allow banks to survive the next six-twelve months and thrive thereafter.
Living in New York City, the sense of concern and even fear about recent events is almost palpable. Many have friends and relatives who work at Bear Stearns, Lehman, AIG, or Merrill; even more have accounts with one or more of those firms.
In contrast to the doom and gloom experienced in recent days, most commercial banks continue to perform well. While few are having high-growth years, many have successfully focused on quality over growth, an appropriate approach in this environment. Even if Wilbur Ross is right and 1,000 banks disappear, another 7,000+ will survive with more being formed once the economy finally reverses itself.
Banks need to downplay the sense of financial panic that is in the air on Wall Street. Fortunately for them, being outside NYC should make one realize that the fundamental economy is adequate, if not strong. What bankers need to do is use this crisis as a lever for introducing changes that they should have made years ago. In addition, for many, it is an opportunity to communicate their financial strength.
What Should Banks Do Now?
For most banks, success starts with credit discipline and, if that has not been addressed already, a bank may become one of the 1,000 mentioned by Ross. In most cases, banks have revisited and tightened risk management procedures. Advance rates have been reduced, industry focus narrowed, and exceptions eliminated.
Obviously, while chief risk officers are focusing on portfolio quality, CFOs are concentrating on capital and funding adequacy. One of the reasons that many banks may be facing a funding squeeze is because top management has failed to focus its bankers on what should be sales priority number one: deposits.
Demand a Deposit Focus Across the Bank
If this crisis has proven anything, it is that liquidity rules. Commercial banks have access to a diverse deposit base, in no small measure because of government guarantees. Nonetheless, many banks find themselves with loan/deposit ratios that indicate they are underfunded and need to go to the brokered CD or other higher cost and more volatile markets.
Small business and commercial bankers focus on loan sales, in part, because they are easier to sell than deposits. Typically, it takes longer to convince a customer to move deposit and cash management accounts. Rather than becoming a reason to begin the deposit sales process today, instead, for many bankers it becomes a reason to keep selling loans and avoid the more difficult but, ultimately, more profitable sale.
What should banks do today?
- Do a quick review of each business, middle market, and corporate bankers’ portfolios to determine the effectiveness of their deposit generation efforts.
- Determine an immediate account-by-account action plan for each RM to build deposits.
- Adjust compensation immediately (a word in too few bankers’ vocabularies) to deemphasize loans and emphasize deposits. Remember, about 60 percent of small business and middle market companies are non-borrowers.
- Follow-up weekly to assess success. Of course, it will take months to move the deposit needle significantly, but we have seen banks show success very quickly.
- Communicate success across the bank. Feature the specific actions that have resulted in capturing deposits. Internal best practices play a powerful role in encouraging others to try new approaches.
- Replace mediocre performers. For example, recent research presented by Ron Buck of St. Meyer & Hubbard shows that, nationally, fewer than 50 percent of business bankers make their sales quota versus 89 percent of the highest performers; similarly the average salesperson spends 25 percent of their time meeting with customer versus more than 60 percent for top performers.
Banks cannot afford to carry mediocre sales persons or managers. Today offers a great time to upgrade staff. In many cases, mediocre players have been allowed to remain for many years. Use this environment as one in which to clean house and better prepare the bank for future growth.
Communicate Your Strength to the Marketplace
Commercial bankers tend to be too reticent in communicating their financial strength to their stakeholders. (Investment bankers do not share this diffidence.) Certainly, this is not the time for humility. Investors and customers need to be reminded of your capital strength. In fact, a bank’s capital position can be a marketing tool. Bank of America bankers stood outside some branches of IndyMac with account opening forms as depositors lined up to withdraw funds.
Avoid false modesty. If you have a strong capital position and good performance, flaunt it.
Final Thoughts
Crises have occurred before and will occur again. This one is particularly volatile and uncertain in its depth and length. However, most of our readers both in the United States and around the world operate banks that are sound and stable. Take advantage of that stability to strengthen your balance sheet by raising more deposits, building a foundation for future growth in 2009 and beyond.