If your bank is going after millennials, there is a better way. Targeting millennials has almost turned into a full-fledged past time for bankers. There are sessions on it at almost every banking conference, and it is the talk of many boardrooms. Banks often treat the demographic cohort as if it is some magical secret to unlocking the future of banking. We think going after millennials is a little like playing dead for a vulture – it is counterproductive.
We will miss Anthony Bourdain. As foodies, he captured our imagination not just with his food, his travelogue, and his attitude, but with his insider’s view of running restaurants. His book, Kitchen Confidential not only changed how we looked at restaurants as consumers, but it was the first time we started to apply some of his teachings to restaurant lending.
Of all the subsectors in bank lending, industrial commercial real estate (CRE) has been a favorite for the past year. Warehouses, distribution, logistics and manufacturing properties have performed well and banks that sought to curtail retail lending over the past five years have largely increased lending on industrial properties. Since this is such a popular subsector, we wanted to take a look at the data to see what we can glean to increase bank performance.
A “pay-for-risk” model means that the goal of the business is to price risk at a premium so your revenue covers the risk and leaves you with an acceptable profit. If you believe that the business of banking is a pay-for-risk model, then we have some bad news for the current state of banking. The mature economic expansion is not a good time for bankers who expect to be rationally compensated for the risk they take.
Recent changes in rates have given bankers a fantastic window into their deposit base. If you are serious about building a more valuable bank, use this time to look at your data in order to see what deposit customers are rate sensitive and which are not. By knowing this, bankers can better market, plan and manage their deposit base in order to achieve better performing liabilities. In this article, we take a look at how banks can analyze their data and what it means.
The Valuable Deposit Base
If you want to know if your bank has an alignment problem, try this – Ask ten co-workers, ”What is it that your bank is selling? If 80% or more say close to the same thing – that is fantastic, and you are likely in the top 1% of bank performance. If 60% of your co-workers say about the same thing, then move on as that is good enough not to make bank alignment a priority.
If your bank is lending on a property with a variety of units available to lease, there is a chance that all those units might be leased up and there is a chance that none of the units will maintain their lease over the life of the loan. The reality is, the outcome is likely somewhere in between. The average banker would look at one set of cash flow and calculate their debt service coverage off a base case using a set of assumptions. The good news is you are not an average banker. Otherwise, you wouldn’t be reading this.
Community banks pride themselves on superior customer service. Our own informal survey has established that 90% of all community banks believe that they provide an above-average level of customer service (the mathematical irony is not lost on us). However, this corporate misperception is supported by a Bain & Co.
The future holds various material changes that will impact how banks currently manage liquidity. We have not had an active Fed Funds market since 2008 but we believe it may be about to start up. As rates continue to rise, it might be time to reverse a portion of the Fed’s $2T of liquidity that currently resides on their balance sheet and return another monetary policy lever back to normal.
There is data and then there is the context around the data. Changing the context of the data changes the interpretation of that data. Context allows us to create signal from noise. If we tell you the average bank has one employee for every $5.9mm of assets, you likely would not care. However, if we tell you that bank performance and the assets-per-employee (APE) ratio are highly correlated and that the ratio is an accurate predictor of future performance, your curiosity is likely peaked.