To solve the problem of decreasing margins on bank products, meditation will surely help, but while you are clearing your mind, ask yourself how effort you have invested in training, products and marketing? We see this all the time, including at our bank. We present one loan structure without equipping our officers in the field with the necessary brand or marketing tools and then are surprised when the customer wants to compete on price. What else can the customer do? If every bank offers basically the same structure, price naturally stands out and begs to be negotiated.
Banker To Banker
As loan pricing becomes more competitive, the opportunity to book high quality credits at thin margins presents itself more and more. A 2% margined loan represents about a 9% risk-adjusted return on equity (depending on your cost structure), which is below most bank’s cost of capital. As such, there is every reason to pass on the credit and let another bank book the loan. However, before you do, consider the following points:
EPS is increased
Put negative press, technology problems and low deposit rates aside, because banks just hit an all-time high in the gold standard of surveys – JD Powers. Their 2014 Retail Bank Customer Satisfaction survey talked to 80,000 customers in 11 regions and rated banks above $2B in assets on channel, problem resolution, products, facilities, fees and account information (Rankings are based on numerical scores, and not necessarily on statistical significance).
After meeting and demo-ing some 70+ companies at Finovate (including non-presenters), there is more of a gap that we alluded to yesterday. Yes, the technology presented was interesting and the show format perfectly efficient, but there are a couple more glaring holes outside of the lack of discourse around profitability and risk management plus the lack of innovation around handling the small to mid-sized commercial customer that we highlighted yesterday.
Yesterday, we had the opportunity to attend Finovate, the Super Bowl of financial technology held in San Jose, CA. We came away a little underwhelmed from the community bank perspective but were pleased that most of the technology was headed in the right direction. The venue and the show were up to its usual high standards and seeing 33 companies in one day was highly efficient. However, the discussions could have taken place three years ago.
We just released the first version of our loan pricing calculator and it is now available for free to financial institutions. If you say your bank is all about service, then you need your lenders to have this model because allows your lenders to move the conversation away from the price on the loan to what structure best matches your client’s profile. The calculator produces a matrix of prices for different amortizations and maturities and takes into account interest rate and a large part of liquidity risk.
Next to C&I, commercial real estate ("CRE") loans have been one of the best performing asset classes for banks in 2014. Spreads continue to tighten on CRE and are expected to suck in another 8bp by year end making the future look bright. With banks coming up on their mid-year asset allocation review, all looks stable for the majority of bank asset classes with the exception of the difference between commercial real estate and residential mortgage holdings on bank’s balance sheet.
We often compete for tax-exempt municipal credits through a bid process. Over the years, we have learned a few things that have improved our odds. We pass on our best secrets in hopes that we can increase your win percentage.
There is a simple mathematical concept known as the “maximum of sequence” that every banker should know in order to increase performance. The concept is derived from the "Marriage Problem" made popular in the 60’s that presents the following issue: Suppose you must choose a spouse out of 100 applicants. You may interview each one once and after each interview you must decide whether to marry that person or not. If you decline, you lose the opportunity forever. For the uninitiated, the odds of finding the best partner are about 1 in 100.
For a bank that is behind budget, has a real estate concentration, has too much asset duration or just wants exposure to certain industries, there is a program that should be met with open arms, as it is ideal to help strengthen your bank. Today, CenterState introduced its National-to-Local Loan Program to help community banks add C&I loan growth and diversify their balance sheet in a customized manner.