Community banks often treat all sized loans the same when it comes to pricing. A $3 million loan is priced the same as a $700,000 loan. For banks that do this, keep in mind that they are not one, but two steps away from reality when it comes to superior bank performance. For starters, a larger loan is more profitable since a $10 million loan takes almost the same sales, marketing, underwriting and booking effort as a $1 million loan. As such, profitability is different.
Tag: Bank Performance
We were underwhelmed by the creativity of last night’s Super Bowl commercials, but it makes sense that Budweiser’s top rated commercial took first place. While it was basically the same ad as last year, the data shows that if you put a puppy in an ad, the odds of success go way up. Further, if you put that puppy in peril and then have a cross-species rescue, what could be cuter? Budweiser played the odds and garnered 45 million views and the top ranked ad spot while Pete Carroll, well, did the opposite.
If you’re a bank that keeps a loan pipeline report, chances are you have some excellent data that will form the basis of making your bank more efficient. The column chart below is one bank’s data where we looked at all the loans that made the pipeline report and then looked at the percentage approved and compared it to those loans that fell out either due to losing the loan to another institution (40% of the fallout), withdrawn/tabled by the borrower (32%), declination (14%), insufficient information (10%) or other (4%).
While some banks are challenged to expand or even maintain loan balances, the industry has experienced impressive loan growth over the last four and one-half years. The below graph shows the Federal Reserve data for loan balances for all banks excluding the top 25 largest banks (the top 25 largest banks follow a similar path). This data covers from 2007 to the present and shows how loan growth, particularly over the past year, has been strong.
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.
When we tell banks they need to get to a 35% efficiency ratio to be competitive in the future they look at us like we are crazier than an outhouse rat. Let’s set the branch debate aside (the largest functional cost area) as that is basically a philosophical argument. Let’s just look at your next largest functional cost – loan processing. We get challenged all the time by banks telling us they are “already at full capacity” and “we are already lean.” We point out that there is a difference between being at full capacity and being at optimal productivity.
It is an age old tradition in banking that management firsts asks the business lines for their budgets and then takes those budgetary estimates and turns them into revenue and/or profit targets for the sake of compensation. While having sales goals is better than not having goals, basing the goals off budget hurts the budgetary process and results in sub-optimal sales incentive response to drive behavior. Let’s look at what happens.
Banks all understand interest rate risk, so understanding how hedging managing risk is an easy one. However, there is currently a conflict with banks that on one hand say they don’t believe rates are going up so taking more fixed rate exposure is acceptable, yet have a rate view of that of the forward curve (which does show rates going up). This issue is compounded by the fact that these very banks mostly have loan growth for 2015 exceeding GDP (3%) which would indicate faster than expected expansion and indicates higher than expected rates.
If you ever doubted the power of a CEO, consider Jill Castilla, CEO of Citizens Bank of Edmond. Taking over at the start oft his year, she has been quick to change the culture. While the Bank is well regarded for its use in social media, the bigger story here is how a CEO can create an environment of innovation, risk taking and fun. More importantly, Jill has given the Bank a personality which has worked to strengthen its brand.
It is likely every quarter you look at a set of peer group metrics and compare your bank. “Bank ABC produced a 16% ROE. How are they doing it,” you ask. Your CFO responds that they are doing it by booking more C&I loans. You then commit the organization to booking more C&I loans. Do you see what happened there? Your strategy is to copy a competitor. It is done thousands of times per day by banks, as we tend to mimic deposit/loan pricing, branches, marketing and positioning.