Executive Summary: Despite the slow growth economy, the best banks are increasing the bottom lines of their commercial businesses. Commercial bank management needs to refocus and reenergize its marketing efforts. Alternatively, it can spend even more energy trying to justify its mediocre performance to an increasingly unsympathetic senior management.

 

 

Financial services executives agree that the economy will remain in the doldrums through 2011 and likely through 2012 or even beyond. In addition to the macroeconomy, Dodd-Frank, the Durbin amendment, and other regulations limit areas in which banks can expect to generate strong earnings. Nevertheless, most executives, directors, and shareholders demand growth. Failing to grow will choke the stock price and, potentially, result in the increased irrelevancy of a company and, ultimately, its disappearance. Growth is good.

 

With retail-related earnings (from overdraft fees, mortgages, credit cards, among other areas) under attack, commercial banking activities can step up to generate substantial growth. Yet, many commercial bankers say they cannot grow and bemoan the current environment, emphasizing the tougher competition and lack of lending opportunity. However, despite the negatives noted above, we have spoken and worked with financial services companies that are growing their earnings by 20-30 percent or more. How are they generating growth?

Specialization.

Operating as a generalist C&I banker is a loser’s strategy that condemns a bank to responding to RFPs, commoditized pricing, and minimal marketing differentiation. In an era of organic economic growth, generic banking may work, but not now.

 

Almost without exception, the best performers exploit their exceptional knowledge of an industry. Those doing so cite multiple benefits to a niche focus:

 

• Improved marketing results (and lower marketing costs) due to the bank’s reputation in an industry.

 

• Competitive differentiation versus other banks.

 

• Better ability to provide “customized” solutions.

 

• Pricing premiums from customers valuing the expertise (admittedly, that premium is reduced from prior years).

 

• Stronger portfolio quality resulting from knowledge of industry cycles and collateral values.

 

Niche areas can include non-borrowers as well as potential borrowers. Some banks focus on cash management oriented industries or other fee generating opportunities. The more popular industries include health care, energy, and technology. Even within these verticals, players pick their spots. For example, one energy lender focuses on solar while another player with an energy specialization avoids all solar deals. Management needs to focus on a handful of vertical areas based upon a rigorous assessment of screening criteria including: size of market, competitive set, internal capabilities (or capabilities that can be obtained), risk appetite, bank reputation, and market positioning. Assessing the segment focus at a cross-section of banks indicates that different segments are appropriate for different banks. Look to banks such as Chase, Wells Fargo, and Comerica for examples of specialization areas. In particular, Chase’s web site provides some good detail concerning its approach to verticals.

 

Rigorous sales processes.

The banks growing in commercial banking operate a sales factory. They follow a sales management philosophy that has existed for years, although it has been applied consistently by only a few banks: Targets are selected/screened for acceptability; call goals are set and call quality is monitored; team leaders are sales managers not bureaucrats; productivity and performance are measured and rewarded. One banker at a well-respected sales leader underscored the need for basic sales energy: “The biggest obstacle in our business today is not enough touches.” At his bank, management begins by making sure that a high number of quality calls are being made.

 

Question: How many calls are your business and commercial bankers making? It should be no surprise that the more calls made, the better the results. The old and sometimes maligned “sales funnel” works. In addition to a funnel, the best players institute strong coaching and sales management. As one team leader commented, “If the banker makes 30 quality appointments per month and is not selling, the Team Leader is failing.”

 

Another aspect of a rigorous process, this one tied to client management, involves eliminating fee waivers and tightening up areas of revenue leakage such as earnings credit rates. Fees waivers are minimized by requiring the approval of a central decision maker; taking this authority out of the field increases fee capture. While client relationships need to be protected, past fee capture projects that we have been a part of resulted in very little client resistance.

 

“A” players.

During good times mediocre players still contribute. (Just apply the cliché “a rising tide carries all boats.”) But, during these hard times, mediocre employees become a substantial drag; increased productivity and per FTE profitability need to become the norm. Many banks hesitate to make the tough decisions related to employee top grading; however, the banks that we think are best positioned for growth have changed a significant percentage of employees. For example, one bank replaced 40 percent of its sales staff in the past year. Costly and time consuming retraining programs have to be balanced by new employee hires.

 

No excuses.

One team leader recently made the following blunt comment about his bankers: “There is no excuse for them not making their number. They just have to find out how.” Sometimes it seems that bankers spend more time explaining why they cannot do something rather than simply doing it. With a no excuses policy, the banker needs to push himself to perform. If deposits are worth little and commercial lending is slow, he needs to look at other types of loans and fee opportunities, including cash management and insurance, among others. Still, it may be asking too much to expect bankers to develop these alternative strategies on their own; team leaders and their managers need to assist in setting the options for growth.

 

Concluding thought.

The performance gap between good and mediocre banks will widen over the next 12-24 months. The best players are already positioned to win. Others have a short time to alter their marketing focus, sales processes, and employee effectiveness.