As our community banking delegation finishes off our second week in India, and before we head to the Middle East, we wanted to recap what we learned from meeting with some of the top bankers and government officials in order to give a taste to our readership of what banking is like in this most amazing country. American bankers would feel right at home as banking isn’t all that different save for the fact that the Indian culture and economy throws in a few obstacles.
Banker To Banker
When rates rise there are two main offsetting effects on the value of bank’s loans. On one hand, rising rates usually mean an improvement of both the general economy and of a particular sector. Not only is demand improving, but some sectors, consumer products for example, are more sensitive to improving economic conditions. On the other hand, rising interest rates is also is a result of a rise in the price level of inputs such as labor, raw materials and rents. Taxes are another area that, depending on industry, can be positively correlated to a rise in interest rates.
If your bank is looking for a road map to the future, follow Capital One. Like BBVA, TD Bank and a number of others, banks should be thinking about a technology acquisition before their next bank acquisition. At a minimum, bank boards should weigh other investment alternatives to whole bank purchases and see which investment alternative can provide the highest risk-adjusted return. Oftentimes, acquiring equity in a technology company where a product can be immediately leveraged can often result in a faster and more fulfilling accretion to earnings.
We are in India this week talking with bankers to see what can be learned from an emerging country with 1.2B people, but essentially only 21 for-profit banks. With 1 branch for every 9,000 people, India is the 3rd most unbanked country only surpassed by China and Singapore.
Many banks talk about delivering a targeted local approach, but end up spending their marketing budget to garner a mass appeal. Nine times out of ten, this is a mistake and by utilizing a different approach, banks can be more efficient in their marketing dollars. As usual, solving this marketing problem is a function of asking the right questions. The question is not “How does the bank acquire more customers,” but “How does the bank acquire the right customers.” This means that first you have to understand who the right customer is.
There are three things that are not really welcoming to an adult over 50 years old – starting a rock band, learning to snow ski and banking. While the rock band and skiing are self-explanatory it is rare that you hear issues with banks. This isn’t because the issues don’t exist. It is because Americans over 50 are reluctant to complain for a variety of reasons - most notably not wanting to admit to themselves that they need help. Having just passed the half-way point of this decade, aging has been on our mind and it seems our industry could do better.
The Kansas City Fed released an interesting research paper titled The Effect of Risk and Organization Structures on Bank Capital Ratios. The research looks at how risk and a bank’s organizational structure impacts its capital levels. In times of stress, does a bank holding company (BHC) structure help protect a bank or hurt it?
There are approximately 94.5 thousand branches in the United States, which on a per capita basis, puts us in the middle of the global pack. China and India, of course, are very underbanked by that measuring stick, while Spain and Italy are extremely overbanked. When it comes to states, Puerto Rico is underbanked with more than nine thousand people per branch, while Iowa is the most overbanked state at basically one branch for every thousand persons.
For many community banks, a concentration in real estate lending may be an issue. This is especially concerning given the recent decrease in capitalization (cap) rates across many geographies and property classes. While community bankers have a difficult job trying to diversify their balance sheet away from real estate, we wanted to present a couple quantitative points that will make the job of risk management easier for banks.
Community banks need to make a plan to upgrade their current core system to one that handles real-time processing in order to stay competitive. It is crazy the amount of cost and energy our bank (like almost all banks) spends on mimicking a real-time environment, the risk associated with such and how much of an operational hindrance a batch environment is. Consider that in the next three to five years banking will be a 24/7 activity and community banks will not be ready.