Executive Summary: Many U.S. banks view the present environment as one in which growth whether in assets or the bottom line is particularly difficult, if not impossible, to achieve. However, banks that rethink their traditional approaches can grow in the short term while establishing a path for sustainable profitability.
An article in Tuesday’s American Banker discusses the fourth-quarter results of JP Morgan Chase and M&T banks. Chase grew its total loans by 0.3 percent while commercial loans increased by 3.5 percent from the prior quarter. M&T generated a 2.3 percent total loan increase and 4.7 percent for commercial loans. These are obviously small increases but widely viewed as positive indications of these two banks rebounding from the downturn while other bank contract their portfolios.
Given the low rate of loan increases, revenue growth is emerging as a major issue for the industry. A Wednesday New York Times’ article quotes a banking security analyst saying “This decade for U.S. banks will show the worst revenue growth since the decade of the Great Depression.” Total industry revenues dropped 1 percent in 2010.
Yet, organic revenue growth is possible. Discipline and rigorous execution are the keys to growing loans. In addition, many banks also need to broaden their loan offerings by teaming up with third parties that offer specialized loan products of interest to previously underserved segments.
Discipline and execution.
As basic as these two characteristics are, they are in short supply at most banks. In our experience the majority of banks lack strong sales discipline, particularly in the commercial bank. By discipline we mean that the bankers follow a clear sales roadmap. They know who they should call on and how often, they know which products they should emphasize, and they know their “script,” meaning they follow a checklist during their target meetings to make sure they diagnose target needs quickly and effectively and prioritize areas for future follow-up.
Here’s a quick checklist of actions to consider if your bank wants to move the needle on sales activity. Initially, most banks should focus on the clients they already have in their portfolio, moving those clients to relationships from transactional players:
* Have bankers develop relationship plans for their top ten customers. The plan should quantify the total loans and deposits held by the client whether at your bank or another. Depending upon the customer, your analysis should also include cash management, 401(k), or foreign exchange activities. Conduct the same analysis for the owner and key employees with an emphasis not only on loans and deposits but also wealth management opportunities.
* Compare current wallet share versus the total for the above; determine the banks that have the rest of the business and find out why you have not captured greater share. (The customer will tell you.)
* Create an action plan to increase wallet share. That plan includes: what products/services you should be offering the target, who is the internal decision maker(s), what are the key decision criteria.
* Now the hard part: meet with customers to discuss, that is, tell them you want more of their business and discuss with them how to get it.
The above approach is a million miles away from the unstructured approach that many bankers follow. Whether or not banks follow the suggestions above, they should be operating with a consistent approach. Unfortunately, almost every bank we know fails the consistency test.
Obviously, asset growth has to take second place to maintaining excellent loan quality. As part of this emphasis, increasingly, banks of all sizes are centralizing the credit decisioning process. This allows the line banker to focus more time on business development rather than “behind the desk” activities.
New loan products.
Before the downturn, commercial real estate (CRE) lending fueled much of the asset growth. That is now a dead area for many due to concentration limits and/or bad debts. Banks need to refocus on C&I lending that centers on working capital needs. In addition, they may need to team up with third party companies that possess expertise in specialized lending areas: leasing, secured lending, and factoring, among others. Managing and exploiting third party relationships is a skill that few banks possess but may need to develop.
Beyond lending.
Note the comment of M&T’s CFO, Rene Jones, that for M&T a bigger payoff came from relationships with commercial borrowers who in the American Banker’s words “delivered higher loan syndication fees, cash management services fees and advisory fees.” While many banks will fall back into their traditional patterns of emphasizing lending, the greater (and safer) growth opportunity will hinge on fee generation. Banks need to consider dedicating deposit/cash management officers to focus on these opportunities. Many will find that trying to retrain lenders is a long and frustrating process.
Concluding thought.
Banks need to build and maintain a sales machine that generates revenue growth both from non-traditional as well as well-established areas. Lending and relationship building is much more a craft than an art. Key elements of the banking craft can be categorized and presented to others as a “system” they can follow. Once a bank builds the foundation for its sales factory and its culture changes to a focus on the entire relationship (business and personal), revenue and the bottom line can grow.