Executive Summary: A stagnant economy, high levels of delinquencies, and limited excess cash are all factors contributing to the no or low growth scenarios that most banks face. However, stakeholders, in particular investors, will abandon banks that veer off a growth path for too long. Management needs to rethink its various growth “levers” and determine which it can employ today and over the next 12-18 months.
Many of our clients bemoan their inability to achieve organic growth. In almost every area, lending activity, whether because of the borrower or the bank, is down.

 

 

The list of negative factors affecting the banking industry is long and may still be growing:

 

• Corporations are increasingly relying on strong cash management to reduce borrowings

 

• Small business owners are conserving their cash and limiting growth-related activities

 

• Many consumers are swearing off credit cards

 

• The Government has put its spotlight on what they consider “deceptive” lending practices; many of those practices were quite lucrative for the banking industry in the short term

 

• Even Wealth, viewed by many bankers as an economic oasis during bad lending times, has suffered at many banks as a result of lackluster performance and rocky private banking loans

 

Today is an environment, perhaps unlike any other period in most bankers’ lives, in which mediocrity in marketing, in underwriting, and in strategy will lead to mediocre results, at best. Many senior bankers will readily admit that until the recent past it was very difficult not to make money in banking. Spreads were solid, loan performance was strong, and “natural” growth pulled many banks from one good quarter to another. No more.

 

Yet the same banking witch doctors are offering the same medicine, that is more training and more technology, which has often not worked before. What practical steps can senior management take?

 

First of all, there is no magic potion that will alleviate this crisis.
Strategy is important but day-to-day execution is even more so. Unfortunately, most banks are terrible at executing. Instead of determining their approach and sticking with it, they waver and wander first down one path and then down another. The result is that employees, customers, and investors are confused. Of course, not all banks suffer from this failure. However, for every US Bancorp, Umpqua, and BB&T there are dozens, maybe hundreds, of other banks that operate without a clear or effective direction. These banks and others like them excel because they rely on daily excellence in performance rather than the latest technology, training, or other unfulfilling lifeline that vendors offer them.

 

Second, doing nothing is not an option.
Yes, the ostrich often seems to be the national bird of banking, but following that approach in this environment will result in extinction. Banks that do not find a way to grow will lose internal talent, investor interest, and customers.

 

Three steps to consider.
Obviously, it is easy to point out the problem but not so easy to determine the solution. Here are three; none may be the magic bullet but when linked together or with other activities they can result in meaningful growth.

 

1. FDIC Shared-Loss transactions. We have written and spoken extensively about the economic attractiveness of these transactions for U.S. banks and foreign banks wishing to expand here. While the number of interested buyers has increased dramatically, these are still great deals for the banking industry.

 

Beyond the fundamental economics of these deals, several buyers have highlighted another element of entering these agreements. These bankers view these deals as a way to increase revenues and earnings during a period when organic growth is elusive at best. Shared-loss deals can provide a near-term earnings “pop” that they believe provides them with the necessary time to find longer-term growth paths and/or allow their traditional markets to regain their strength.

 

2. End the peanut butter approach to investing. One Financial Times columnist wrote of the way in which many executives determine their investments. They apply a peanut butter approach, spreading the available investment dollars over a wide area, sacrificing commitment for coverage. They fail to put dollars in the areas where the greatest growth opportunity exists. Why? In part to hedge their bets and in part to avoid a nasty confrontation with an area manager. But, look at some of the top performing banks today and you quickly understand that they are no longer (if they ever were) trying to be all things to all people. They know what they stand for and are acting on that.

 

3. Don’t forget about strategy. At many banks, thinking about three-year strategies for the bank or individual businesses has been replaced by thinking about next week and what it will take to survive that period. Given the volatile times that is understandable…to some degree. However, now is a time when articulating what your bank stands for and then living that vision day after day will pay off now and during the next few years.

 

Concluding Thought
We view the next few years as a period in which significant consolidation will occur. The number of failed banks will exceed at least 500. In addition, hundreds and ultimately thousands more may disappear because of their inability to generate attractive returns. Standing still means sliding backwards in the new banking world.