Here is what some industry observers and bankers are saying about the outlook for banks in 2006:

“65% of bankers surveyed nationwide say they are pessimistic or neutral on the outlook for this year. That’s sharply up from last year when only 32% were similarly dour or neutral.” — Business Week, January 30, 2006

“The latest [fourth quarter] results show that many banks are finding it tough to generate profit from traditional lending because of the shrinking difference between long-term interest rates charged for loans and short-term interest rates paid on deposits…mortgage profits fell.” — Wall Street Journal, January 20, 2006

“Despite being one of the few remaining independent community financial institutions in the new Philadelphia/Dover area, the market price does not reflect the potential value of FFD’s [FFD Financial Corporation in Cleveland, Ohio, that operates as a holding company for a small community bank] business franchise…Ancora [Ancora Capital, an Ohio based hedge fund and an investor in FFD] believes that FFD should take action immediately to realize that potential value, and that operating under the current business model, the company will never achieve more than modest profitability at best.”
— Financial Times, November 22, 2005. Quoted by James Altucher in his column, “Why ‘bank’ customers are getting active.”

“This year, it will get harder for us to make our numbers.”
— Bank executive

Bank managements express negativity about the outlook because they are finding it more difficult to find growth areas for earnings while net interest income contracts; credit quality is almost too good, certainly too good to remain at current levels; investors may be getting increasingly edgy about their portfolios, demanding rather than requesting change. For most players, the bottom line outlook is uncertain with more banks facing the risk of disappointing Wall Street.
 
The Road Ahead Is…

Based upon the above observations, investor nervousness, and our own client experience, the road for bank performance in 2006 is increasingly rocky. Yet, we find that few players are operating with detailed plans for addressing issues of squeezed margins and slower growth. Hoping that the interest rate, mortgage, and competitive situations improve while credit quality stays strong is not a strategy that will work.

So, where should banks start?
 
Push the selling energy. To this day, only a handful of banks have strong sales cultures or organizational structures (including easy-to-understand incentive compensation) that reward sales success. Despite the demonstrable impact of getting in front of your customer more frequently, the percentage of time branch and commercial bankers spend in front of customers remains too low.

Compensation is an important part of the success mix. The all-in compensation gap between a very strong sales person and a mediocre one should be huge; too often it is not. However, few banks really reward top players and too often compensation schemes emulate the complexity of the Rubik’s Cube puzzle.

Build a solutions approach to selling for top-end customers. We have written frequently about the importance of account planning and team-based selling, and we stress it in our work. Interestingly, even top law firms like Akin Gimp have adopted this methodology to ensure client satisfaction and, ultimately, to grow wallet share. Again, banks have been slow to institute this discipline, leaving responsibility to the individual bankers. The result: inconsistency and poor wallet share penetration.
 
Sell products to most customers. Many customers (perhaps the majority) do not merit a solutions-based/account planning effort. Most consumers and small businesses do not offer a wallet large enough to allow relationship managers to diagnose the opportunities they offer. This is where leveraging technology can play a critical role in determining where a bank should focus for additional sales. For these customers, product-based selling is critical. A bank can avoid positioning it as pitching products by the way it positions its marketing offer. However, selling the right products is a good thing, for the customer who needs them and for the bank’s bottom line.
 
Build and execute a bank-wide program to capture revenue opportunities and reduce costs. This comes last in the newsletter but may be first in impact. Remember reengineering? The bank reengineering programs of the 1990s successfully uncovered processes that could be streamlined and highlighted costs that could be eliminated. However, the way these programs were managed resulted in most being much less successful at capturing additional revenue. (Note: I worked on three of them — Corestates, First Security of Utah, and Star Bank.) Nonetheless, a “refined” reengineering program can offer great value and play an important role in strengthening the culture or transforming it into one of increased customer sensitivity and focus. Banks with earning pressures or those banks that want to remain top performers should evaluate the value of conducting an initiative like this during 2006.

By the way, this is one time that consultants really can show that they play a critical role in achieving results in a short period of time; while a program of this type demands the close involvement and leadership of insiders, management will not achieve maximum results running this program without outside guidance.

Concluding Thoughts

The year is still young, and the opportunity for immediate action that has near-term results still exists. Banks cannot afford to see how the numbers develop over the next three-to-four months. They should be taking immediate action, action that indicates that they know they may be in the middle of a crisis. The fact is that many banks, whether they know it or not, are in just such a situation.