Executive Summary: For the foreseeable future, U.S. banks will be operating in a relatively slow growth economy. That does not mean, however, that your bank is condemned to a slow growth path. History provides some good lessons and warnings for future action.

 

 

I recently came across a 20-year old presentation (dated May 30, 1991) written by consultants at Strategic Planning Associates, a highly analytic firm at which I was a partner years ago before it was “rolled up” into a larger firm. Its title: “The Art of Banking in a Period of Declining Revenues.” While 20 years old, the report describes an environment much like today:

 

• Overall, a trend toward declining bank revenues.

 

• Many banks have failed to contain costs in light of a revenue decline.

 

• Loan demand is erratic.

 

• Quality of earnings is a major issue, as banks focus on maintaining high loan quality.

 

• Diversification of revenues away from traditional lending activities has been an engine for growth.

 

Losers in 1991.

This presentation also summaries some of the characteristics of the losing and winning banks in 1991. The messages are as relevant now as they were then. For example, in outlining the poor performance of Manufacturers Hanover, a bank that was merged into Chemical Bank and then into Chase, the consultants listed several actions that led to the bank’s demise:

 

• The bank diversified without focus, trying to be all things to all people.

 

• Inadequate control of an “expansionist lending culture” existed.

 

• Performance measurement systems were poor.

 

• Good businesses were starved of capital.

 

Each of the above observations applies to weak performing banks today:

 

• The first point mentioned remains relevant: many banks fail to determine where and how to segment their energies, thereby, falling into the trap of trying “to be all things to all people.” That approach was difficult to sustain 20 years ago; it is impossible to sustain now.

 

• We can all cite multiple current examples of the negative impact of an expansionist lending culture, whether tied to mortgages, commercial real estate, or other areas.

 

• To this day, we see many banks unable to provide sufficient analysis of performance trends. “Systems” continues to be blamed when the fault usually rests with management weaknesses.

 

• Banks starve good business of capital in many ways. When they cut costs, many try to do so across the board, using a shotgun approach rather than a laser. Further, their tendency to try to do too much and serve too many results in insufficient emphasis on those businesses in which the bank can truly differentiate itself.

 

Winners of 20 years ago.

What about the winners of 1991? Three banks were mentioned: Wachovia, Wells Fargo, and Bank of America. Of course, since 1991, Wachovia, once a great Winston-Salem regional, disappeared into First Union and, after a disastrous acquisition, into Wells Fargo. Today, few would put BofA on a top performing bank list. Further, while Wells remains a top bank, it bears little resemblance to what it was 20 years ago. (There is probably a different newsletter concerning why it is so difficult for top players to remain top players.)

 

Nonetheless, the elements listed concerning “what they did right” still apply:

 

• Strong credit culture with solid, quality portfolio.

 

• Consistent cost focus (that was true of the old Wachovia almost to a fault).

 

• Good internal process for allocating resources to priority growth areas (the Wachovia of 20 years ago was one of the first banks to emphasize cash management as a business).

 

• Strong sales culture at the branch level (for Wells Fargo true 20 years ago and true now)

 

• They exit businesses with low value creation.

 

• Focused strategy and segmentation. These banks focused on their selected segments (for example, at that point Wells Fargo emphasized being a top California bank).

 

The above list summarizes the basics of being a top performer: credit culture, sales culture (sales and credit cultures are not in conflict, although at many banks they appear to be), cost discipline, and knowing your strengths and weaknesses, using segmentation to emphasize one and avoid the other.

 

Rex Ryan, coach of the New York Jets says that “football is an easy game, made complicated by coaches.” Well, even today, commercial banking is a straightforward business, made complicated by managers (and many would say regulators). As the 20 year old SPA presentation summarizes, winning banks:

 

• Understand their economics.

 

• Understand their competitive position.

 

• Make the hard and right decisions (always easier to recommend than to do).

 

• Segment and Focus.

 

• “Sweat the Assets”, meaning get as much out of each businesses as possible and exit those that are losers.

 

I would add at least one more: Be excellent at implementation and follow through. I have worked on many projects in which the bankers say that they can handle the implementation without outside guidance or push. If that were the case, more would get done more quickly at banks.

 

Concluding thought.

Winston Churchill once said: “Those that fail to learn from history are doomed to repeat it.” The essentials of success in commercial banking remain just that: essential.