Banker To Banker

Why Some Banks Are More Profitable Than Others – The Nonlinear Customer Equation

Customer Profitability Equation

Why do some banks grind it out and struggle to produce a 9% ROE, while other banks such as Bank of America and Chase produce 30% plus ROE for the same business segment? One answer is that banks that produce an above average ROE either have a more profitable customer segment focus, more profitable products or a more profitable business model. While we have covered the first two in previous blogs, today we highlight an aspect of a more profitable model known in bank profitability circles as the “non-linear customer equation.”

 

How Liquidity Comedy May Turn Into ALM Drama For Banks

Comedy may run headlong into drama for banks as asset-liability management (ALM) risk may bare its fangs for banks that aren’t careful.  It is almost a joke on how much liquidity there is in the system and it would be funnier if banks were not potentially at the butt of the punchline.  Unfortunately, for ALM practitioners, this environment is one that we have never seen so its lessons are likely to stick to the ribs of experience for some time.

Should You Play Music In Your Branch?

Music In Bank Branches

Honestly, we are not huge supporters of the opera and go there really only under special circumstances - like when we are forced to go there under gunpoint. Maybe it’s our ADD, or maybe we are too used to Game of Thrones, but in opera it can take a performer up to ten minutes to convey a simple concept such as, “She left me.” Most country songs can do this ten times in thirty seconds.  

 

Here Is One of the Most Profitable Customer Segments That Banks Can Go After

Segmentation Marketing

If you are looking for a sweet spot of a new customer segment then we submit to you that you should be going after accountants, CPAs and tax preparers (collectively, “accountants”). While you might have competition, this group is less banked than the doctors, dentists and other medical practitioners, plus accountants are almost equally as profitable. When you consider that the average accountant provides a bank with five or more business or household referrals per year, the total profitability jumps almost to the top of the list.

This Graphic Should Give Every Bank Shivers

Bank Technology

When Goldman Sachs reports that 33% of Millenials think they won't need a bank in five years, know that they could be right. Below is a graphic from CB Insights that shows how there is a startup fintech company that almost covers Wells Fargo's entire business model. Look closely as they take Well's website and map back to each startup. This is a great graphic to display at your next strategic planning session (that is hopefully a quarterly meeting) as it generates a conversation about what areas your bank is going to defend and what it might cede to a startup.

 

How Banks Can Conduct A Next Best Product Analysis To Boost Profitability

Next Best Product Marketing

If you have ever been on Amazon or Zappos, you have seen the recommendations or the “customers that bought x, also bought this” either on your screen or been subjected to an email campaign. It has been said that 35% of Amazon’s sales are driven by behavior marketing, which is largely driven by their recommendation engine. Major banks employ the tactic as well and the methodology is what drives many offers behind Wells Fargo’s industry -leading product-per-customer metric or Capital One’s profitability.

Past Patience – How Banks Might Want To Adjust Lending Strategy

Bank ALM Positioning

Federal Reserve has finally broken the patience barrier.  The Fed has said in its official policy statement since December of 2014 that it will be patient before raising the rate.  In dropping the promise to be “patient” before acting, the Fed opens the door to a discussion about a rate increase at its June meeting.  Now, several members have noted that they want that option if the economy holds up between now and then.  Officials also made it clear in recent interviews and public speeches that they want to move awa

4 Mistakes Banks Make When Pricing Fixed Rate Loans

Pricing Fixed Rate Loans

When it comes to pricing fixed rate loans, we see banks do some crazy stuff. For example, if your bank is pricing off a fixed rate spread using a floating rate index such as Prime, then go directly to jail, don’t pass Go and don’t collect $200, - that is an asset-liability tragedy. It is also equally bad to just pull a fixed rate out of the air or base the fixed rate on the competition without knowing what the interest rate risk is. Given the recent pricing volatility, if your bank does that, you could find out that you are 20 or more basis points in the hole.

Here Is Proof That Yield Maintenance Is Better Than Luck

Hedging or Using Swaps For Loan Value

While we honor the Irish this St. Patrick’s Day, it is important that banker’s don’t leave loan profitability to luck. Given the talk of rising rates, we expect a rash of borrowers that have loans coming due in the next three years to want to refinance and lock in lower rates.  Accordingly, our prepayment model for floating rate, adjustable and fixed rate loans expects loan prepayments to increase for community banks over the course of 2015 and 2016. This might be bad luck for some, but it is probabilistic for us.

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