Recently, I was speaking to a client, a vendor to the financial services industry. He asked, “What are the banks doing to prepare for growth once the down cycle has ended?” My immediate response: “In most cases, nothing.” Unfortunately, my glib response was also highly accurate. While the banking industry is certainly piloting through tough times, most of the 8,000 FDIC-insured banks will survive; many do not act as if they will.
 
Internal Focus Rules
Understandably, the banking industry is focusing on managing through its current crisis. Risk portfolios need close monitoring, recoveries must be emphasized, costs need to be reduced, pricing should be brought more in line with current market conditions, and so forth. These are all near term, immediate priorities. However, most bankers are so internally focused on these and similar issues that they are losing touch with their customers and, ultimately, will lose market and wallet share to more forward-thinking bank and credit union competitors.

 

The press is full of stories about businesses and consumers expressing a sense of betrayal at their banks. Many of the stories seem to highlight the biggest banks, positioning them as, at best, heartless and, at worst, criminal in intent. We have also seen multiple stories contrasting uncaring banks with customer-oriented credit unions. The industry has allowed credit unions, a group that we believe is largely ill-prepared to take on a significant role as a sophisticated lender to appear to be “the good guys” versus banks. This is occurring despite the excellent track record of the industry in supporting the growth of businesses.

 

Again, unfortunately, too often press stories accurately portray what my small business owner friends and my own experiences confirm. For example, one owner of a successful lower-end middle market company bemoaned the quality of service and attention he was receiving from his long-time big bank and discussed his intent to shift to a credit union. Another recounted the increasing length of time required to get commitments from his bank. One banker I know even commented that at his bank “you can smell the fear” and said this was one reason for their having pulled back lending activities.
 
Looking Outward Wins
Why are so few banks thinking about the future and determining how to position themselves for it? Why are so many financially solid banks failing to take advantage of the environment to grow?

 

• A belt and suspenders mentality. Many bankers want to be as certain as certain can be that their portfolios are whistle clean. They are forcing their clients to jump through hoops that never existed before. In some cases, their requirements become arbitrary roadblocks rather than reasonable requests.

 

• Next quarter focus. Given the volatility in most banks’ performance, managers of publicly-owned banks find it difficult to think beyond the next quarter.

 

• Hazy timing. When does the economy bottom out and the upturn begin? “Expert” predictions we have seen range from the end of 2009 to sometime in 2011. That uncertainty increases the difficulty for a risk-adverse manager to commit to a future-oriented course.

 

• Government influence. Many banks are managing with one eye looking ahead and the other searching for regulators. While the Obama administration wants to encourage lending, the regulators have increased their vigilance, causing bankers to put a premium on dotting all “i”s and crossing all “t”s.

 

These are reasonable influences directing a banker’s actions, and management is prudent to pay attention to them. However, one other key element that leads to lack of action is less acceptable: Many banks have no strategy for growth. In addition, they fail to understand the value of strategy, believing they can survive by selecting short-term tactic after short-term tactic. As the competitive environment intensifies, that approach will succeed less in the future.

 

Many banks know where they have been and know where they are, but do not know where they wish to head. Conversely, we see the best banks using this environment to determine which businesses, regions, and even market segments fit with their long-term focus. The answers they develop and the approaches they follow can be distinctly different depending upon the strength, capabilities, and aspirations of the institution:

 

• One client reviewed multiple business lines, narrowing the geographic focus of its businesses to more closely align them with its branch footprint.

 

• Another bank with a different strategic emphasis decided to go national with some businesses that had primarily been regional in focus.

 

• A third decided to invest heavily in a near-by region in which it had minor share, taking advantage of current market disruptions.

 

One client recently reviewed the deals his bank was evaluating at its credit committee meeting. He found that the chaos in his region, resulting from major banks pulling back and one being forcibly merged out of existence, provided tremendous growth opportunities. He views market dislocation as a gift that keeps on giving, providing choice new client opportunities.

 

While his bank has suffered from some credit losses and capital erosion, he and his Board view the bank as fundamentally sound and well-positioned for the future. Most banks are in the same position; the difference is that this management has both the necessary strategic plans and the determination to look beyond the next quarter or even next year to a more stable and typical operating environment. Rather than playing catch-up when this occurs, it is positioned to be a growth leader.

 

Final Thought
Of course, bankers need to focus on the near-term issues, but that is not enough. Begin to look beyond the next six-twelve months. Do not wait until then to think about the long-term positioning and strategy of the bank; waiting that long will be too late.