Executive Summary: 2008 will be a very difficult year for U.S. bankers operating in the SME and retail spaces. However, rather than bemoaning the fact, management should consider several near-term steps that can have immediate positive impact and position the bank for improved future performance.
Virtually all our US clients and targets expect 2008 to be the most difficult year in recent memory. Factors dimming enthusiasm for this year include: unrealistic budgets in the face of a slow growth economy, across-the-board rather than targeted expense reductions within the bank, and significantly-increasing loan provisions across the bank. While making easy (or relatively easy) money is gone for a while, smart banks can use this opportunity to take some steps now that they should have taken during better times.
1. Increase account loads. Line bankers bemoan how busy they are, but in many cases, their portfolio of accounts fails to generate an acceptable return. Now is an appropriate time to demand more profitability. For example, we have seen instances in which individual middle market account loads could increase by 25-50 percent without adversely impacting customer service. How? By management insisting that RMs focus on high-value-added activities and not allocate significant time to tasks that administrators or others might perform. Making this change allows management to capture some relatively easy cost reductions.
2. Streamline the product set. Most banks continue to offer too many rather than too few products. The product assortment confuses the customer and the line banker. Analyzing product revenue and profit performance usually shows that a handful of products drive performance (the old 80/20 rule). Reducing the product set can increase operating efficiency and result in a more targeted and effective sales focus.
3. Reprice upwards. In recent years, pricing has been whittled down by increased competition and a more engaged customer base. Now is the time to regain some of the margin lost in previous years. Management should dictate a borrower-by-borrower review aimed at increasing net interest and fee income. If a banker cannot increase margins now, then when?
4. Close sub-par branches. The lemming-like march of banks to open more branches has finally ended. The current market environment erodes the economic case for more branches. Even more significant, demographic and cultural changes are increasing the movement of transactions out of the branch. In our view, opening new branches is increasingly harder to justify. Conversely, it is increasingly easier to recommend that poor-performing branches be closed. Just as it is the right time to exit poor performers (see Step 6), so too it may be the appropriate time to shut branches that fail to meet economic hurdle returns. Branch leaders seem to be facile at developing a list of reasons why a branch is underperforming and why it will soon turn around. Senior management questions should intensify and its tolerance for accepting sub-par performance should disappear.
5. Target weak competitors.Assuming your bank is not one of them, now is a great time to take aim at the customers of poor-performing competitors. Many of these banks are going to be inwardly focused for months. Past experience strongly indicates that customer service and marketing will suffer at these players, providing a great opening for aggressive new business solicitation. Strong prospects, facing uncertainty with their main bank, may be more interested in switching or at least adding on another bank than they have been for years.
6. Remove poor performers. As a leader, you know that some of your employees have not pulled their weight for years. You have kept them for a variety of reasons, but you cannot afford to keep them any longer. Poor performers can be offered up to the cost cutting gods in your banks. In a best case, you will have the opportunity to replace them with bankers who are disillusioned at the weak competitors mentioned above.
7. Generate deal flow. Years ago, I remember speaking with Ed Morsman who was a credit head at Norwest in Minneapolis. His view was that, even in bad times, a bank wanted to see as many deals as possible. When times are tough (that is, now), this approach allows a bank to be highly selective in the deals it pursues. Particularly with some major players impersonating an ostrich (head in the sand), a higher benefit will accrue to those players who focus on the external market rather than internal conflicts.
8. Avoid across-the-board budget cuts. Banks that require across-the-board cuts are making a mistake. Not all groups should suffer the same reductions. In fact, some groups should be given dollars to expand while others are shrunk more extensively. For example, typically, a bank’s small business and private banking efforts should be funded for growth. Cost reduction is valid but needs to be conducted with a scalpel not a hacksaw.
Concluding ThoughtIn 2008, US banks need to be more aggressive in maximizing the use of whatever profit levers they have available to them. Loan losses will rise at virtually all lenders this year and slower national economic growth will translate into reduced opportunities for most banks. Whether management takes the actions suggested here or develops its own near-term approach, the current banking industry crisis (and that is what it is) creates what may be a once-in-a-career opportunity to introduce significant and winning changes to a bank. Failure to do so is just that … failure.