A week ago American Banker featured a story about United Western Bancorp, a $2.2 billion bank headquartered in Denver titled, “Time to Cash In Profitable Side Lines?” The article told of the bank selling its trust company, pocketing a healthy profit while shedding itself of an underutilized asset. The article went on to mention two other banks selling off other businesses: Irwin Financial announced it was selling its home equity and small ticket leasing businesses and United Community Financial Corp. sold its brokerage and trust businesses.

 

Recently, we have been working with several clients on projects related to their reconsidering the mix of businesses they own and operate. Banks, both well performing and those with capital issues, are reviewing their portfolios to determine the long-term attractiveness and viability of business units, whether de novos or acquired as part of a bank acquisition. They are looking at these businesses with changed expectations, demanding high risk-adjusted returns and clear links to other parts of the bank.

 

Now is the Right Time to Rethink the Business Mix
During the recent good times, many banks allowed lines of business to operate with little outside management focus. Businesses that operate as independent corporate “silos” often include trust, wealth management, asset management, brokerage, commercial finance, student lending, and SBA lending, among others. While sometimes viewed internally as orphan businesses, these groups often contribute significantly to earnings, albeit with highly varied returns on capital.

 

The current banking downturn has resulted in banks changing their tolerance for non-core companies for several reasons:

 

*  Banks need to encourage and, if necessary, force a relationship focus on their customers; typically, individual product sales do not result in cross-sell or customer “stickiness.”

 

*  Capital and liquidity are in short supply. In particular, lending-only businesses are less attractive because of their use of capital and, oftentimes, their inability to generate deposits.

 

*  Cash is king. Having increased liquidity may be more attractive than operating a stand-alone business. In turn, these silos may offer more value to a company with a focus on a particular specialty (for example, trust or asset management) than to the present owner.

 

But, Should it be a Sideline?
One bank’s “sideline” is another bank’s highly profitable specialization. We have had multiple client engagements in which part of our focus has been on trying to get senior management to recognize, appreciate, and build a unit it has viewed as non-core. Given the right circumstances and management interest, areas such as trust and commercial finance can generate highly attractive growth.

 

These projects usually require FIC to work with the business line to identify areas for growth and increase its linkages with and relevance to the core bank. Typically, this involves developing the economic fact-base, generating projections related to the market potential, detailing the benefits that the unit provides versus other business options, assessing risk issues, highlighting areas where it can partner with other bank LOBs, and, as appropriate, specifying why the bank should make a clear commitment to growing the business. However, in some cases, whether for reasons tied to returns, capital needs, culture, or other factors, senior management decides to exit or minimize its investment in an area. Those are appropriate and rational business decisions; however, in other instances, we have seen bank managements that fail to understand a businesses’ potential and, thereby, lose out on what should be a good growth opportunity.

 

Our point is that the sideline of today (think of cash management twenty years ago) could be the growth engine of tomorrow.

 

What is a Core Business?
Recent columns in the New York Times, the Huffington Post, and elsewhere have suggested that banking return to its glory days when bankers were “boring.” By this they mean that bankers should stick to the basics and avoided exotic structured instruments. However, bankers experiencing margin declines and increased delinquencies from “vanilla” loans would reject this simplistic concept; “boring” does not automatically translate into safety.

 

Coming out of the recession, what businesses will be core for your bank? Rather than starting with a product approach (for example, mortgages or investments), banks should begin by evaluating what they are best at today, what they aspire to be best at tomorrow, and what their customers would like from them. To begin with the customer, increasingly, beyond stability, they want advice and insights from their financial partner. Banks that cannot provide this type of input will be relegated to being a commodity provider and see their wallet and market share whittled away.
 
Concluding Thought
Unfortunately, in today’s environment, bankers with aspirations beyond survival and paying back TARP are hard to find. Further, the dynamics of banking success involve more moving pieces than ever before; the government, customers, competitors, investors, and analysts all have shifting and sometimes indecipherable requirements.

 

Nonetheless, this is a great time to determine and stake out your new “core” whether this involves serving a different geography, making a sideline a main line to growth, or rethinking your reliance on a high-cost and increasingly anachronistic branch delivery structure.