Why You Are Watching The Wrong Lending Competitors

Credit management - graphic of man looking through binoculars

No doubt, you hear all about how your competitors are winning deals because they are more aggressive when it comes to underwriting. While banks must always ask if they are taking the right risks and the right amount of risk, it is probably the competitors that you are not watching that is causing you the greatest risk. In this short article, we explore one often overlooked aspect of competitor surveillance and how this one technique can help protect your bank.


Enhancing Your Pipeline Management Meeting


If you don’t already, during your relationship manager (RM) pipeline or staff meeting where you talk about sales and revenue production, there should be a section of each RM’s report that covers competitor intelligence. For example, transactions won or lost is an obvious one or details of other term sheet presented to clients are also important. Any new products or services should be highlighted; any material hirings or separations; or any major organizational changes such as mergers or management changes should be brought to the attention of the group.


6 items to track on your bank competitors


Hopefully, you have a place in your customer relationship management (CRM) system to capture the information that can serve as a reference for all RMs going up against a particular competitor for a piece of business. Knowing this information can help you better your position and price your products and services. If a particular national bank, credit union or non-bank won a piece of business, hopefully, that intelligence can be leveraged for the next time you are competing against that entity.


The Importance of Tracking Who Is Not Competing


While banks do a good job at highlighting the transactions that were lost to competitors, few banks track and highlight when a competitor STOPS competing. This is critical for an often underappreciated reason – adverse selection. When a competitor pulls out of a lending line such as the case in some markets for multifamily, homebuilder loans, or speculative construction, banks that are still lending in those areas now get more volume. The larger the competitor is that pulls out, the more of a signal this should send.


Now maybe the competitor that stopped lending in that area just hit their limit on their capital allocation for that sector but maybe they stopped due to some intelligence about the state of the market. If it is the later, you don’t want to be that bank that is quickly increasing and potentially underpricing exposure to a segment that is increasing in risk.


This was one of the major lessons learned in 2006. Credit spreads started to dramatically widen during that fall, and by the fourth quarter, some banks significantly curtailed lending in key areas. Some banks continued to cut back over 2007 but many community banks continued to lend right into the mouth of one of the worst downturns on record. Consider that while some banks were trying to reduce their holdings, the average community bank was increasing assets by 10% or more despite having the news of Bear Sterns, Lehman Brothers and AIG in the market.


Putting This Into Action


Build a process where you can routinely collect competitive information with emphasis that your relationship managers or lenders highlight when they don’t see competitors that would normally be involved. It also pays to build questions about the competition into your sales discovery process so you know who your prospects bank with and then ascertain way these banking relationships are not bidding on a particular piece of business.


When a major bank stops lending in an area, chances are your bank will see an increase in volume. While that volume may be a stroke of good luck, it also may be the opposite.