Reduce liability for losses on commercial accounts by adhering to four requirements.
Imagining the Possibilities for Growth and Profit
Economist Brian Wesbury opened the Missouri Bankers Association’s Executive Management Conference in St. Louis last month with a keynote presentation labeled, “It’s Not as Bad as You Think.” Also the title of his most recent book, the phrase more or less set the tone for the conference, with speakers suggesting ways to survive and prosper in a challenging economic and regulatory environment.
Wesbury, of First Trust Advisors in Wheaton, Ill., believes the country has economic hypochondria. “I’ve never seen a time when people were so fearful,” he said. But when Standard & Poor’s downgraded U.S. debt nothing happened. The congressional super committee failed to come up with spending cuts but holiday sales surged and Black Friday was the best ever. “We’ve got problems,” Wesbury conceded, “but we always do.”
Personal consumption this year is $650 billion above its 2008 level, “but people don’t want to believe it,” he said. Capital spending by businesses, which represents 8 percent of the economy, is on the rise but the media focus on housing, which is 2 percent of the economy. Commercial and industrial loans are on the rise as well, Wesbury pointed out. “Anybody who says banks are not lending is crazy.”
In a breakout session on strategies for adapting to the current banking environment, consultant Don Hutson, national industry partner for BKD CPAs & Advisors, cited common characteristics he has observed in high-performing banks: high productivity (one employee per $3 million of assets or more); high efficiency (less than 55 percent); focus on opportunities in their markets; niche-focused; and truly understand the current business model and the contributions each line of business brings to it.
Branch networks are one place to look for efficiencies, Hutson advised. The break-even asset size will likely need to increase from $10–$15 million to at least $30–$40 million per location, he believes. Return on investment at each branch must be measured against the benchmark established by the bank, he suggested. They must be staffed for efficiency and a high level of productivity; some branches may need to be open only part-time; and loan production offices may suffice in some locations.
Staffing and employee performance are also among areas to seek possible efficiencies, Hutson said. In addition to raising the average assets per employee, he suggested most if not all employees will need to be technology proficient; they will need to be multi-functional and have the ability to adapt to a changing environment; and they will need to embrace true expertise and commit to the training needed.
He warned the MBA members that net interest margins will likely decline over time and fees are under pressure and likely to decline, then suggested some possible remedies: find true niches in the market; truly price for risk; monitor the big banks and changes to their fee structures; charge fair fees for services; educate customers and employees on the changing environment and the cost of doing business.
Finding efficiencies and new sources of revenue were also the subject of another speaker, Lee Wetherington, director of strategic insight for ProfitStars. Among his suggestions were capturing demand deposit account share from big-bank fee defectors; serving the growing population of unbanked, under-banked and Gen Y, who love prepaid cards and comprise 25 percent of the population; generating new fee revenue with merchant-funded rewards offered inside online statements and ultimately in real-time via mobile texts; and leveraging merchant rewards to incent/compel migration of offline customers to online self-service. Wetherington reported that according to Javelin Strategy and Research data, the average annual customer cost can be reduced by $167 through conversion from offline to online self-service for such things as balance inquiries, funds transfers, elimination of paper statements, lower transaction costs and reduced check and cash processing costs.
In Wetherington’s view, appropriate overall strategies for 2012 and beyond would include exploiting the efficiencies of e-channels; evolving branches from transactional to relational; serving business customers/prospects — the majority of whom are not being served and represent the easiest fee opportunities; and capturing new customer segments and fees with prepaid card programs.
Bill Poquette is editor-in-chief of BankNews.
Copyright (c) January 2012 by BankNews Media