The best description I know concerning how banks operate through cycles was provided by Ed Morsman, a now retired but still highly respected senior credit officer of the old Norwest bank. He once described the typical management approach followed by many banks as emulating the back and forth swing of a pendulum.

The pendulum swung from an emphasis on sales in good economic times to an emphasis on credit in bad times. When the pendulum swung to the sales side, bankers beat the bushes to increase their loan volumes and, in many cases, banks untied their credit restraints in order to increase their credit sales. Conversely, when the pendulum swung to a concern about credit, sales activities largely stopped. Deals that would have been pursued aggressively were, if not killed outright, memoed and covenanted to death.

This week, in particular, is one in which for many banks the pendulum has swung firmly to the “credit” side of the sales/credit arch. While understandable and, to some degree, necessary, management must ensure that the bank remains focused on its external market and current customer needs while protecting itself from erosion in credit quality. These goals are both achievable and in synch with one another.

Morsman expressed the view that in difficult times he wanted to see as many potential deals as in good times. Why? First of all, the more deals the bank saw, the more selective it could be in approving the best quality opportunities as well as in achieving growth. Second, I think he viewed his responsibility in part as trying to mitigate the extremes of the pendulum’s swings. Even in tough times, attractive deals are in the market (in fact they may be easier to get); similarly, in the best economic times, it is important to avoid opening up the loan spigot too far. Moderating the factors behind the extreme swings of the sales/loan pendulum results in steadier profits.

That said, today all banks are more inwardly focused than they have been in years. However, the smartest banks have tactics they use to succeed in a tougher environment:

* Centralize collections. At many banks, the tendency is to assign the RM with responsibility for collections, following a “cradle-to-grave” approach. That is a mistake. Most RMs lack the required expertise and focus for success in this area. In addition, it takes them away from what they should be doing: selling, whether to current customers or new targets. Instead, once a collection problem occurs, responsibility should shift to a specialist unit that possesses the knowledge, experience, and mindset to be effective.
 
* Get senior management to call. This is exactly the time when top management should be in front of customers rather than barricaded behind their desks. Bankers should use this phase of the cycle to stroke top customers and attract new ones. Yet, this is a period in which an internal focus and endless meetings seem to take precedence over the customer.

* Exploit the weak competitor. Twenty years ago, Chemical Bank in New York had developed an internal data base that identified the banks used by key targets. When one of these banks was acquired or announced some negative event, Chemical’s telemarketing group and its bankers would be on the phone to the customers of those banks. Current newspapers are littered with the names of weak banks and the Internet provides even more institutions to target. (By the way, this opportunity further underscores the need to centralize collections so salespeople can sell.)

Recently, a real estate broker stood outside the Bear Stearns building handing his cards to employees who had just lost their jobs and may have wanted to sell their homes. While this may not seem a “gentlemanly” approach, these type of guerilla tactics merit consideration, as others will follow this path to taking share from weak players.
 
* Double your deposit focus. Companies can have acceptable risk portfolios and still fail due to loss of investor confidence. A strong core deposit base not only reduces the cost of funding but also reduces funding volatility.  This is more critical than ever. However, bankers rightly believe that SME-related loan growth is easier to achieve than deposit growth. That is why most bankers focus on loans versus deposits.

While it would have been best to develop a deposit orientation five or more years ago, it is better to develop one today than never do it. Begin by reviewing the deposit product set for completeness and quality versus competitors; consider establishing a “deposit-only” sales effort, one that focuses on deposit-rich industries, companies, and people; change incentives so that the RM emphasis shifts to deposits from loans; appoint a senior level deposit guru whose mission is deposit retention and generation.