When I think about the key theme that cuts across our various advisory engagements, the desire for growth and the difficulty of achieving it prevails over all others. The impediments to growth are greater than ever, but the mandate to generate quality growth had never been stronger. How does management maneuver through the many minefields it faces to get to growth?
Why grow?
Of course, I could spend this and other columns writing about the impediments to growth, whether external or internal. But you already know what those issues are and, in any case, it is supposed to be the season of good cheer. However, it is worth considering why banks and others FIs want to grow:
* Stakeholders demand it. Obviously, shareholders want to see growth in order to invest and gain from a strong return. Top employees also want to work in a growing company because it allows them to learn, develop, likely make more money, and view themselves as part of a leading organization rather than an also ran. The banks we know, whether public or private, all see growth as an obvious indication of their successful management.
* The cost base requires it. A recent Wall Street Journal article mentioned United Southern Bank in Kentucky, a community bank with about $250 million in assets. The article states that while assets have remained relatively flat in recent years, the need to hire additional compliance people has increased significantly. Banks require an increased revenue base simply to support the higher cost base that, in effect, the regulators have mandated.
* Grow to sell. The same article quantifies how the number of banks has dropped to below 7,000. More owners see no light at the end of the regulatory and compliance tunnel and have decided to exit the business. They are not quite trying to put lipstick on a pig by growing, but they do want acquirers to value them at a higher multiple based in part upon their growth track record. The more your assets, the more your sale price, in all likelihood.
How to grow.
No secret sauce exists that allows FIs to grow. The path to growth is limited, relatively easy to articulate, and largely self-evident (That won’t stop me from listing the most likely approaches):
* Sell more to your current customers. Cross sell requires hard work, but it does result in more revenues per customer. This should be almost every bank’s number one priority. Very basic, but most banks do not know what wallet share they are missing and lack concerted programs to target wallet share growth. (As mentioned in other newsletters, our BPA capability addresses the bank’s internal information gap and directs bankers to priority targets.) Banks need to focus on meeting as many needs of the household as possible, eliminating the internal silos that limit success.
* Increase banker productivity. I am almost embarrassed to list something so basic, but bankers do not seem embarrassed at failing to accomplish this goal despite its importance. To this day bankers are spending time on tasks that other staff can do both cheaper and likely more effectively. The relationship manager job has to redesigned to get the banker in front of the customer with ideas rather than behind the desk shifting paper and filling out internal bank forms. Yes, I know the regulatory burden has become absurd but, frankly, it is part of senior management’s job to meet compliance requirements without crushing the banker’s sales effectiveness.
* Target. As noted in the WSJ article, the management of the one new bank created in recent years, Bank of Bird-in Hand (no kidding), decided that it could succeed because it was going to specialize in the Amish market, an underbanked segment, since the one local bank that once focused on them had been sold to a bigger bank. Despite a vast amount of evidence, many banks fail to segment their efforts to the extent they should. Being a vanilla lender today borders on the suicidal, as margins shrink and an increasingly sophisticated and demanding borrower benefits from more competition for their business. Partly because of regulators and partly because of bank leadership and tradition, too many banks focus on the same type of companies and credit quality, a strategy that can only lead to mediocre returns.
Segmentation involves knowing the details of your current customer base, making an accurate assessment of your bank’s strengths and weakness, and determining where you can outperform your competition. As I have written before, segmentation choices can go beyond industry to include types of products (loan or non credit), life stage, credit quality, or other characteristics. Recently, we have seen banks focus on equipment finance as a differentiator that can distinguish a bank with its customers and also allow a lender to take its specialized knowledge outside of its local or regional geography.
At many banks maintaining the status quo wins out over innovation and taking some calculated risks that can lead to growth. However, those same banks risk becoming both irrelevant to their customers and incapable of generating the types of returns required to justify their continued existence. Growth is not an option.