While most banks have successfully navigated through the “Great Recession” over the past five years, they now face a new, dangerous obstacle: the “Earnings Recession.” Across America, countless chief financial officers of banks are providing a mediocre and uninspiring view of earnings for 2014:
- Margin will still be compressed in a zero-rate environment and with delayed Fed tapering.
- Mortgage revenues will be down substantially as the refinance market ebbs and home purchase financing replaces less than 20% of the refi volume.
- Checking fees and interchange have lost their growth “mojo” as the regulatory and competitive environment eats into legacy margins.
- Compliance, technology and health care costs will all need to be absorbed in a flat revenue environment.
- Loan loss provisions will have to return to normalized levels as steady loan growth kicks in.
One word to describe next year’s budgets:
This revenue-poor banking environment is being reflected in bank stocks today. The Financial Times recently reported that more than $1 billion has been lopped off earnings estimates for Wall Street’s five biggest banks. The two charts below indicate that bank stocks have generally outperformed the S&P over the past two years.
This advantage has clearly waned in the past 90 days.
It is critical for bank executives to realize just how different today’s revenue environment is from days gone by:
- Today’s industry net interest margin is 3.27%, down from 3.76% 10 years ago.
- Today’s industry noninterest income to assets is 1.85%, down from 2.26% 10 years ago.
What these two numbers mean is that banks are operating with $130 billion less revenue than they would have had with the same revenue margins of a decade ago.
For bank executives, this will be a crucial time of establishing credibility with the board of directors, with the investment community and with employees. ROA and ROE will not be the measures to hold up to say, “We are winning!” Instead, GonzoBankers will need to view 2014 as a year of proving market viability and demonstrating future earnings momentum. Think about the next few years as the time when the tired old legacy banks will be separated from the new, progressive banking organization that will knock out growth and performance in a changed industry.
Gonzo executives will not let a boring earnings year become a boring strategic year. Rather, they will force their organizations to think big and make 2014 one of the most exciting years in terms of the strategic development of their franchises. For those chosen executives ready to burn the midnight oil, there are several big hairy audacious goals (BHAGs) to go after next year:
BHAG #1: Hit the Streets – Ninety-five percent of banks are far from where they need to be in terms of team-based sales activities. Sure, we’ve had the sales training, put in a tracking system that no one trusts and kicked around the idea of changing incentives, but most banks are still about business lines doing their own thing. One of the most important performance indicators in 2014 needs to be revenue increases generated from existing customer relationships. Please note, I did not say “cross-sell.” The mindless pursuit of a number that has little to do with revenue growth is a waste of time. Instead, banks should be focused on new wealth management fees added through commercial and retail referrals, new cash management fees and balances added from increased joint calling and new mortgage and home equity production generated from branch activity. Most of this growth in production will not materially impact 2014 earnings, but it will build a base for future years, and it will contribute substantially to the energy and mojo that banks need to win in the future.
BHAG #2: Delivery Alignment – Banks must use 2014 to take a hard reality check on the contribution and role of their branch systems while getting more aggressive on improvements to their remote delivery capabilities. Everyone agrees that branches and remote delivery channels will coexist, but “God is in the details.” GonzoBankers will aggressive look for ways to reduce costs in both their brick and mortar square footage and in their legacy technology contracts in order to free up investment dollars in areas such as mobile, enhanced cash management capabilities, improved Web sites and new e-payment pilots. Importantly, GonzoBankers will use 2014 as a time to admit just how crappy their Web and mobile experience is for customers and start the relentless pursuit of improvements. Assigning accountability to an executive for delivery channel improvement is a great place to start.
BHAG #3: Process and Efficiency Improvement – The lack of urgency that bankers apply to process and efficiency improvement initiatives inside their organizations is just plain sad. Accountability is often unclear, deadlines are habitually missed and process and technology issues are buried deep in the bowels of the operation and rarely escalate to senior management for decisive resolution. Banks will never move the ball in process improvement if they do not apply the same level of urgency to these initiatives as they do to a merger or regulatory order. Make 2014 a different year. Identify the bank’s “Top 3 Process Improvements” (e.g., commercial loan origination, financial dashboard reporting, new customer onboarding) and push these initiatives through with executive sponsors and visibility at the management level.
BHAG #4: Niche Development – As banks push each month to hit loan growth numbers, manage fees and watch expenses, it will be vital in 2014 to quietly keep working on the unique niches that can give the bank an advantage in the future. Business professor and best-selling author Roger Martin was famously quoted in 2012 as saying, “The heart of strategy is defining where you are going to play and how you are going to win.” Whether it be an industry niche (e.g., software development companies), a loan product niche (mortgage warehouse) or a fee-based niche (HOA payment services), banks should ensure that strong business and marketing plans are being developed and aggressive goals set for the future growth of these niches. Too often, banks let a niche opportunity bounce aimlessly through their organization and they never see it reach its potential in terms of earnings contribution.
BHAG #5: Culture and Leadership – Wow! Anyone looking around the room at a bank board and executive meeting would surmise, “We have a demographic problem.” The wisdom and deep expertise in this industry continues to charge closer and closer to golf courses and early bird specials at the Country Kitchen. Many bankers in their 30s and 40s lack the breadth of experience across banking functions that the older generation gained from the classic bank training programs that no longer exist. Although it may sound soft, there is a true Gonzo payoff from efforts to define and guide the bank’s culture and invest in more formal programs for leadership development. Bank executives should use 2014 as a year to identify 5 to 10 future leaders in their organization and get them more involved in development and collaboration efforts. The energy alone that is unleashed from these efforts is worth the small investment of time and money.
The next era in banking will be about who can show top-line revenue growth that leverages capital without being nuts about risk appetite. Revenue growth will feel like pushing a Chevy Suburban uphill in 2014. However, GonzoBankers will realize that the best predictor of future revenue growth in 2015 and beyond will be the Strategic Growth that occurs inside their organizations next year. Go time!
“Make Your Attitudes Your Allies”
–David Schwartz, from the classic “Magic of Thinking Big”
BHAGs ‘r’ Us
Ready to make 2014 one of the most exciting strategic development years your franchise has ever known? We’d like to help you reach that goal!
Utilizing our knowledge of best practices and expertise gained from helping hundreds of financial institutions with their strategic planning efforts, Cornerstone Advisors can help ensure the successful development of your organization’s Strategic Plan.