At some of our client banks, the budgeting process has already begun or will begin over the next few weeks. Budgeting can be a big productivity killer; we have seen instances in which the process itself becomes an excuse for reduced marketing and customer focused activity by line officers. In this slow business environment management cannot allow that to happen.

 

 

Typically, the commercial/small business budget focuses on increases in loans and loan fees as well as deposits levels. But, that focus alone is a losing strategy. Most small businesses are not in an expansive mood. The bankers we talk to tell us that, in many cases, their customers view the economic outlook with uncertainty and are holding back at least until the next election before they act.

 

 

Limited lending.

 

While circumstances have improved since the recession, the just released Wells Fargo/Gallup Small Business Index underscores the level of concern with which many small businesses are living. To quote a summary of the survey results: “The number of business owners expecting to be in a good financial position over the next 12 months declined seven percentage points to 59%; those expecting increased revenues in the next 12 months declined by six percentage points to 43%.” Further, while 53% of business owners say they made large capital purchases over the last 12 months, only 41% say they plan to do so over the next year. Relatively small ticket items (computers, software, and mobile devices) dominate the future shopping list. Many of these items will be financed out of cash flow or company credit cards; they do not provide major lending opportunities.

 

Banks making lending gains are doing so largely by stealing share from others. In many cases we hear of banks that are undercutting others on rate and all too frequently on terms, for example, eliminating personal guarantees or loan covenants. Of course, that is a dangerous path that suggests many in the industry suffer from short-term memory loss. There are a relative handful of banks that are taking loan share because of a “unique” offer: truly better customer service versus the big banks, demonstrable industry expertise, valuable structuring capabilities, and other factors. However, those banks are the exception versus an emphasis on loan pricing and terms.

 

 

Banks need to emphasize “new areas.”

 

Bankers and their managements should be very wary of budgets that feature significant loan growth. Management needs to question the sources of that growth and the key factors that will allow those goals to be attained. Is there a specific competitor or two that can be targeted to capture disaffected customers? Are there industries or other specialized knowledge that can be exploited? Can significant rate reductions be avoided? Can strong risk management policies be maintained? What monthly metrics need to be established and reviewed to make sure both the goals and quality remain on track? In many cases when these and related questions are considered, likely loan growth will be minimal, in most cases less than double digits.

 

This time a heightened focus should be placed on other areas such as capturing more of the small business household and product areas such as cash management, wealth management, retirement planning, and other non-lending activities. That is not to suggest that banks have not considered these areas previously, but their importance to a bank’s bottom line has increased significantly. In other words, these areas are no longer options or minor revenue generators; in more cases they will offer the lead opportunity.

 

Every analysis we have seen or done points to the small business household as offering at least as much revenue potential as the business itself. For every dollar of business loan/deposit revenues another dollar or more of owner and employee related revenue also exists. Most banks barely scratch the surface at capturing those dollars. However, when we speak with product specialists we often hear tales of insufficient and/or mediocre leads and bankers who fail to possess the diagnostic skills and product knowledge required to broaden a bank’s revenue base.

 

 

From goals to execution.

 

To avoid too much reliance on loans and capture more “non traditional” revenues, banks need to reorganize and in some cases change or shift their staffing. Unfortunately, today, many banks are focused on blanket cost cutting rather than considering how to reinvest in growth areas and reposition their banks to operate in a multi-year low interest rate environment.

 

With loan growth down and greater use of centralization and standardized processes, banks likely need fewer small business and commercial bankers. Job redesign results in being able to do more with less. We think that banks should apply much if not most of the dollars that this productivity process frees up to strengthening their non-credit product and sales activities. The old days of the bank RM who is simply a loan generator are now gone.

 

 

Concluding thought.

 

This year’s budget process should help to shift a bank’s focus and, to some extent, culture. Past approaches are no longer enough in this slow growth, volatile, and not incidentally, anti-banking environment. The leading banks already realize that they need a different approach to navigate forward. The performance gap between those who make the transition and those who continue down the old paths will only widen in future years.