Now that we have officially kicked off strategic planning season, it is time for all banks to review their lines of businesses to see where they want to add or subtract capital over the next several years. Running a profitable bank is a simple equation of more profitable products to more profitable customers in a profitable way. Unfortunately, there are many banks with this equation exactly backwards – they try to sell unprofitable products to unprofitable customers through an inefficient process.
Tag: Bank Profitability
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.
Banks computing lifetime value of customers know that there are six components: 1) Cost to acquire; 2) Revenue/cost savings (volume and pricing); 3) Cost to service; 4) Relationship life; 5) Interest rate sensitivity; and, 6) Propensity to generate other business (referrals, related accounts, new product uptake, etc.). A customer represents a stream of cash flow and by looking at the revenue generated; the cost of the account and then discounting all that back over the expected life, banks can derive the customers expected lifetime value.
Most banks feel comfortable making smaller sized loans. The obvious reasoning is that a smaller loan will present less of a loss should it go into default - less of a loss means less risk, and, therefore, higher return. That reasoning could be faulty and could end up getting your bank into trouble as often times it is the larger loan that presents less risk. There are three reasons for this. First, the acquisition cost of a larger loan is just slightly more from a dollar value perspective (and lower on a percentage basis) than that of a small loan.
Let’s say you want to refinance a loan for a borrower that is at another bank and the loan has a prepayment penalty on it. The borrower has two options: 1) Refinance today and pay the penalty, or 2) Let the loan mature and then refinance at the then prevailing rate. We have tried all different methods and the way best to frame this problem is to present the solution in the following manner:
It is hard to find a better time not to be in mortgages. If you are a bank, you have some advantages given a lower cost of funds and the ability to cross-sell. However, if you are an independent lender, current signals mean you need to further take capacity out of your system to reduce costs. No matter what your organization, current mortgage economics are eye-opening. Recent data released by the Mortgage Bankers Association (MBA) showed that the average independent lender spent 8 cents for every $100 of principal originated - the worst performance quarter since 2008.
JP Morgan Chase’s new branch in the Texas Medical Center in Houston is special because of what is not in it – teller stations. Instead of a teller line, the new branch features an express banking kiosk or “EBK.” Basically a giant 21.5 inch iPad that customers can swipe, point and click to dispense cash in increments of $1, make deposits, pay bills, withdrawal up to $2,000 and even issue a new, permanent debit card.
When is the right time to refinance an existing commercial real estate loan on your books? Refinance too early and you most likely forgo a larger credit spread. Refinance too late and the borrower seeks additional competition. In previous analysis we showed that the average spread between refinancing with and without competition is about 40bp. Thus, we advocated putting a retention program in place that covers any loan above 1.2x debt service coverage that does not have some form of prepay protection.
PNC is underscoring the latest trend in banking of going to lower cost, more flexible branch foot prints. The Bank is experimenting with a 'pop-up' branch located in Chicago after they experimented with a similar structure in Atlanta. The Chicago location opened today and plans to be there for three months before moving. The pop-up structure not only helps build the bank’s brand as a forward thinking bank, but allows an inexpensive way to open accounts, demo new products, talk about consumer lending and garner feedback from the area on if a future branch makes sense.