We monitor many banking schools and credit training programs and it is rare that we see anyone teach the analysis of a borrower’s interest rate risk position. For that matter, in hundreds of credit reviews that we see a year from a variety of banks, there is rarely a quantification of how rising or falling rates will impact credit risk.
Banker To Banker
Listen, some bankers fear making loans below a 4% margin like I fear Florida sinkholes. To put that in context, I wear an avalanche transceiver whenever I am in the State. This makes bank meetings a little awkward, but gives me a fighting chance to be found when I get swallowed up. By the State’s own website, they refer to sinkholes as a “fact of life” which is why Florida is the only state where banks have to consult the “Sinkhole Clearinghouse” database before making a loan.
While the technology of the smartphone is revolutionary, it was Apple’s App Store that deserves much of the credit. It only took Apple five quarters to surpass Blackberry, the market leader at the time, in large part because iPhone users loved apps. Apps created an “ecosystem” which can be thought of a set of different programs, not only providing value to the user, but making the iPhone more valuable in itself, as well as creating a diversified revenue stream for Apple and millions of app developers.
Many bankers use this equation:
Shareholder Value = Net Interest Margin
However, the equation really looks like this:
Shareholder Value = Discounted net cash flow of customer relationship x probability of recognizing net cash flow
This is a graphic of all 137 million jobs in the US that gives you a feel for the relative size of each employment sector, including the fact that services now makes up approximately 66% of all jobs.
Source: NPR / BLS Data
Banks are always in need of good marketing themes and promotion tie-ins. When marketing is paired with an event or a holiday it becomes even more effective. Promotions on bank website supported by keywords or in the branch supported by word of mouth, leveraging events can add 10% to 20% more marketing effectiveness. Certain holiday’s and events tend to lend themselves to bank promotions, while others do not. Holiday’s like MLK, Jr. Day, Valentines, Mardi Gras, St.
2014 holds a myriad of issues, some of which were felt last year. For example, while interest rate risk was talked about, in 2014 it will be monetized as intermediate rates continue to move and prepare for a more rapid accent in 2015.
The KBW Bank Index finished up 35% in 2013 - the most in 16 years. The S&P, by comparison improved 29%. Many banks were up more than 100%. 2014 looks good, but maybe not that good.
Every January, we advocate taking another look at your value proposition to see if there are any changes that need to be made.
Part of the problem with the current state of banking is that it is hard to tell one community bank from another. Because of this fact, loans, deposits and other bank services have largely turned into commoditized products. In some cases, bank margins are lower than they are for bottled water. If retailers can charge up to $6.00 for water, surely a bank can differentiate itself.
While bankers have rightly started to change the industry’s image from being old and stodgy to being hipper, we caution against swerving into dork-dom. The other day we were in a meeting where a banker started “raising the roof” with the double open hand pumping gesture over his head because of getting a loan approved. Unless you are working with Habitat for Humanity, no roofs should ever be raised in banking.