The sense of concern about the economic uncertainty we are facing seems to grow almost daily, despite various government actions. Both business and consumer confidence levels are dropping, and the pace of the downturn is unprecedented. One example: a recent comment from a very successful real estate broker in New York City, talking about the current state of a market that until recently many viewed as protected from a downturn: “New York City real estate is falling like a rock off the Empire State Building.”

How are banks responding to this environment? Many banks appear to be managing through this period by pulling back dramatically from their clients at the exact moment when their clients (and prospects) need them most. More than once, I cited Ed Morsman, a now retired senior credit officer at Norwest. He spoke of the tendency of banks to go back and forth from an excessive emphasis on sales to an excessive emphasis on credit. It is fair to say that at many banks today the sales/credit pendulum has swung way too far toward an emphasis on credit and the desire to ensure that any new loans put on the books have pristine credit quality; pristine is hard to find even in good economic times.

 

Donald Sull, a UK business school professor, writing in Monday’s Financial Times, highlighted another pendulum that we see operating within banks: “Many companies alternate between growth binges and periods of sober cost cutting.” One example: Over the Thanksgiving holiday, we heard from a friend that one local Merrill Lynch office announced its holiday party…and then three days later cancelled it.

 

Sull also beautifully described the changed environment companies find themselves in: “After years of benign economic conditions, the four horsemen of financial apocalypse – credit crunch, recession, volatility, and uncertainty – are blazing a trail across the horizon.” He goes on to write that most executives “will frame the current conditions as a threat and take action to protect what they have … companies that adopt a defensive position ignore a counter-intuitive truth: the worst of times for an economy as a whole can be the best of times for individual companies to create value … the moment when you can transform your fortunes often emerges during the toughest times.”

 

Defense Comes First…Understandably
Given the current environment, banks appropriately first circle their wagons. They need to understand where they stand from a risk management perspective. Our sense is that most banks have already completed that analysis and have a good sense of their portfolio’s likely performance under various scenarios. The smartest banks have largely stopped relying on models and instead have returned to relying on the judgment and insights of experienced risk management experts. That is a good thing.

 

Banks have taken a number of steps focused on ending the near-term bleeding and improving short-term results, among them: exiting or limiting exposures to the industry and loan types that have performed poorly; repricing loans and increasing fees; tightening covenants and centralizing loan workouts with specialists. The list is long and growing.

 

Going Beyond the Defensive
A few banks are taking some additional actions that have a longer-term and ultimately more significant impact:

 

•  Removing management layers. Layering increases in good times; now is the time not only to deleverage but to delayer.

 

•  Eliminating “nice-to-have” employees. Nice-to-have employees are hired during economic booms. For example, more assistants are hired and staffs expand. The question is: do these people really contribute? All too often the answer is: marginally, at best.

 

•  Exiting poor performers. This area represents a huge win for most banks. At some banks, 30 percent, 40 percent, or more of sales personnel are missing their goals. If your bank has reduced its sales expectations (many have) you do not need as many salespeople, particularly second tier sales people. Even if sales goals remain high, this is a great time to up tier and hire great salespeople escaping from other banks. Frankly, replacing underperforming staff is an area in which we see very slow movement. If management is unwilling to replace mediocre staff, maybe management needs to be replaced first.

 

•  Putting on new business. Too many banks are turning down good deals, deals that they would have been happy to do six months ago. While we do not know the reality behind the hype, US Bank and Wells Fargo, among others, say they are in the market and eager to do business. What an advantage that is for them now and in the future. Many, many more banks should be doing the same, rather than impersonating an ostrich.

 

•  Acquiring others. Seemingly every day, more portfolios and more banks are for sale. While due diligence is a skill that has eluded even some of the most sophisticated private equity firms, there are some great acquisition opportunities today. And tomorrow there will probably be even better ones. Banks, both large and small, have an opportunity to take advantage of their weakened brethren.

 

Concluding Thoughts
While no one asked, this is a very exciting time to be a financial services consultant. The credit crunch, recession, volatility, and uncertainty make for a consulting environment that demands creativity and fortitude. So too for bank managers. Take advantage of the chaos to address issues you know you should have dealt with previously and to create a foundation for future growth. Consider an apt saying that one client displayed in his office: “This too shall pass.”