Tuesday’s Wall Street Journal offered a headline that most banks instinctively know: “Banking Whales Leave Minnows Behind.” The big are getting bigger while smaller banks risk becoming irrelevant to an increasing number of customers.
Most banks suffer from continued market share loss.
The article states that business lending grew by six percent in the second half of 2011. Virtually all of that growth came from six banks: J.P. Morgan Chase, Bank of America, Citigroup, Wells, U.S. Bancorp, and SunTrust. Those six banks total two-thirds of all commercial bank assets.
If those banks are growing in commercial lending, everyone else is not: “All other banks, in aggregate, saw business-loan growth of about negative $1 billion during this period.” Banks with assets less than $10 billion now capture about 20 percent of commercial lending compared with over 60 percent less than 20 years ago, what I think is a stunning change. The smallest banks, those with assets less than $1 billion saw their commercial lending dropping by more than five percent. FYI, banks with assets up to $1 billion total approximately 6,800 and comprise about 90 percent of all FDIC insured institutions.
Not surprisingly, the article concludes: “Imbalances in U.S. banking just keep on growing.” Why has this occurred in commercial lending? Further, why has this same shift occurred in such diverse asset and liability products as credit cards, mortgages, deposits, and multiple other areas.
In commercial lending, the Journal cites larger banks having bigger and more credit-worthy clients as well increasing their focus on mid-sized companies, both accurate observations. The bigger banks have concentrated on the biggest businesses for multiple reasons: prestige, ability to cross sell, and credit quality, among them. Historically, they have also focused on larger middle market companies for some of the same reasons.
However, while the big banks have focused, many smaller banks have failed and continue to fail to determine priority customers and highlight them effectively. Moving from 60+ percent market share to less than 20 percent share can hardly be an oversight by smaller banks. In effect, either implicitly or explicitly smaller banks made the decision to abandon traditional commercial banking…with one exception.
The one exception involves commercial real estate lending (CRE). In this lending area, many regional and community banks were, in effect, “stuffees.” Deal transactors or syndicate leaders contacted the community bank, emphasized the above market interest rates and fees, and sat back waiting for the loan approvals which, unfortunately for the approving bank’s portfolio quality, occurred too frequently. Internally, within banks CRE was viewed as very attractive lending and allowed many banks to bulk up in asset size, a significant goal for many banks. But, we all know what the aftermath was of taking on these steroid-like loans.
Smaller banks are now largely out of the commercial real estate market due to continued “indigestion” and limited lending opportunities. At the same time, many community and regional banks are unprepared to meet the current lending needs of small businesses and middle market customers. Working capital lending provides critical life blood to many mid-sized businesses and, yet, too many banks continue to view lending from the prism of valuing real estate rather than a businesses’ true prospects. Some do not possess a detailed knowledge of the basics of commercial and industrial (C&I) working capital lending.
The Threat.
Larger banks are out selling community and regional players. Big banks appear to be exploiting their pricing power and marketing capabilities to outmaneuver smaller players. Worse still, in many cases smaller players are not even in the game, proclaiming their love for and support of the community but failing to deliver to commercial customers.
Changes required.
Those hoping to compete against the big boys in this segment or even more broadly require some significant changes:
* Priority setting. With increased capital and regulatory requirements, now more than ever, banks need to determine their optimal focus rather than trying to be all things to too many groups. Many managers may see choosing fewer paths as increasing their risk. We see being too broad in your product and market focus as substantially more dangerous. Segmentation is key to differentiation and profit sustainability.
* New talent, that is, bankers who can structure and sell. Yes, Steve Jobs was a visionary who accomplished great things, but he also hired an incredible team that to steal his words was “insanely great.” There are not enough insanely great teams in banking.
*Improved risk management capabilities. As a result of improving portfolios, we already see some banks cutting back in their investment in risk areas. Big mistake.
Today provides a great opportunity for regional and smaller banks to take substantial share from the “too big to fail” banks. However, continuing with past approaches will only result in even lower market share.