We will start right off with the bottom line – Return on equity (ROE) fell for the industry from 9.06% in 2015 to 9.00% in 2016.
Tag: Bank Performance
Over the weekend, Berkshire Hathaway released our (and everyone’s) favorite shareholder letter that never fails to serve as a World Class education in the high-art of capitalism.
Earlier this week (HERE), we covered the how the Growth Efficiency Ratio (GER) can be used to analyze how efficiently a bank can grow. We highlighted an aspect of the efficiency ratio that while it is descriptive as to how a bank’s overhead compares to its revenue, a bank could stop or slow growth to improve its efficiency ratio.
One of our favorite conferences each year is the Bank Director’s Acquire or Be Acquired Conference (AOBA). While the material is a little redundant (there are only so many slides you can see on bank multiple trends), they keep the conference moving so you never get bored. Bank Director also does one of the best jobs in the industry of actually working practicing banks into the panels, so you hear firsthand how they do it and not just some vendor’s theory.
Risk parity is a portfolio allocation strategy that that every bank manager should understand because the concepts are key to understanding how a bank constructs both its balance sheet and its credit portfolio.
Of all the top performing banks, the one that we are most envious of and follow the most closely is Live Oak Bank. Chip Mahan and his team of high performers have reverse engineered the best parts of banking. The result is a radically altered business model that achieves performance through its simplicity – profitable products to profitable customers.
In the early 70’s, after more than 3,000 stores, McDonald’s did a study on profitability. Sure enough, they found that the biggest drivers of the bottom line came down to a strategy of higher margin products to more customers. The famous chain came up with a strategic plan that targeted a specific demographic of middle class, working families and then introduced the higher-margined Quarter Pounder, Happy Meal, and Egg McMuffin.
Unlike Phelps, Biles and Bolt, the second quarter of 2016 was no GOAT. In fact, it was completely average. While that doesn’t sound too enticing to motivate you to read on, there are some trends that you should know about and in this post, we break down current industry trends and give you a complete board-ready presentation at the bottom that you can share to make your team smarter (and save you time).
A couple of weeks ago we published our equation for bank growth (HERE). We broke down bank revenue growth into its component parts and discussed the number of ways to achieve growth beyond “just adding assets and liabilities.” We received a slew of comments from bankers and it occurred to us that the three major missing components in the discussion were the concepts of buying growth, net income entropy and the minimal velocity of margins.
Growth doesn’t happen by accident. You have to put energy into it. If you don’t, the laws of business entropy take over and your customers go elsewhere, move, pass away or just plain forget about you. Most all banks understand this and try hard to gather new customers and retain the ones they already love. However, bank growth is more than a two-dimensional puzzle – it is multifaceted. More importantly, energy must be invested not only at the customer and product level but at the strategic level as well.