There is a brutal feeding frenzy occurring in the banking industry today: the complete commoditization of mainstream commercial and commercial real estate lending. Like a pack of vultures picking at the flesh of a potential new mini-perm deal or term loan, liquidity-rich banks are feverishly bidding down pricing into the zone of shareholder destruction. We see fixed-rate deals for 7 to 15 year terms that carry coupons lower than many banks’ net interest margins. Despite calls for sanity from every senior loan committee across the country, the brinksmanship continues. Business customers have grown savvy, and even the most loyal now send their credit needs out onto the street for competitive RFP bids. Loyalty these days seems to buy about 10 basis points for the banker.
For GonzoBankers this environment creates a classic conundrum: do I play in a game that will most likely leave me regretting a longer-term portfolio of low-margin loans, or do I sit on the sidelines and risk remaining awash in liquidity for an extended low-rate environment. As with any good conundrum, there is no easy answer, but there is a clear strategic mandate for banks: get serious about deep, diversified relationships with your commercial borrowers. For grins, let’s refer to the concept of Commercial Relationship Revenue as “CR2”.For 20 years now, bankers have been touting the opportunity to move beyond a narrow focus on credit and actively cross-sell cash management, wealth management and insurance services to commercial borrowers. Importantly, banks entrenched today in a credit-driven environment are simply shaking their heads when they see traditionally disciplined players like Wells Fargo aggressively pricing commercial loans. Wells is strategically doing this for two reasons:
- It is $1.7 trillion in size so the portion of its balance sheet where it can allow for some conscious interest rate risk dwarfs the size of commercial and commercial real estate portfolios in the community banks sector; and
- Wells has been working on the CR2 journey for some time, and it has a higher level of confidence that it can transform borrowers into profitable relationships. The bank’s remarkable Commercial Electronic Office (CEO) treasury portal and its 24-hour specialized small business call center are just two examples of how this behemoth has aligned its operation around a solid CR2 strategy.
While there are leading Gonzo banks out there that have succeeded in making a transition similar to Wells, most banks are still operating WAY below their potential when it comes to CR2.
There are five key areas that banks need to address to increase their CR2 performance:
1. Relationship Reporting – It is shocking that many banks that tout their focus on commercial relationships cannot even generate a report that indicates which commercial borrowers have a treasury, wealth or insurance relationship with the bank. Even simple consolidated Excel reports are not used to place a bright light on the majority of borrowers who do not have these products within the bank. Executives need to elevate this sad truth and build near-term, joint calling initiatives around this information.
2. Profitability and Pricing– Most banks spend very little time analyzing commercial customer profitability and then incorporating this analysis into informed pricing decisions. In fact, most loan pricing is typically done on some clunky spreadsheet that a senior lender named “Lou” brought from his former regional bank employer. There is little work done on using core data to incorporate actual balances, fees, rates and tax treatments. The result is banks tend to overprice their good relationships and underprice their dogs. Players like City National Bank in California have demonstrated that managing the business around a total view of relationship revenue can pay off in more diversified revenue.
3. Solution Knowledge – It is ironic that commercial banking is a “profession” where relationship managers comfortably brag about what they don’t know:
- “Well, Betty in our downtown office handles Cash Management products so let me e-mail her real quick with your question.”
- “I’m a bit in the dark when it comes to our retirement products but I can bring someone from that group out next time.”
- “We have an insurance agency that may be able to help you. I’ll send you a brochure.”
- “I’m certainly no techie but it scares me just like you how much banking fraud is out there.”
The plain fact is that bankers sell what they understand and they impress prospects and customers with their deep knowledge. If executives continue to allow such a dance of the uninformed, niche players are certain to gain share. In previous Gonzo posts, we have profiled GonzoBankers like Marco Krapels [2] whose injection of capital markets knowledge and support into the relationship managers’ tool box helped drive millions of dollars in new revenue for Rabobank N.A. We also profiled how Synovus Sales Director Luke Mansour [3] conducted road shows among his banking regions to promote commercial product knowledge. If we want to de-commoditize banking and truly call it a profession, we have to radically upgrade the average relationship manager’s product and delivery channel knowledge.
4. Incentive and Accountability Alignment – While Dodd-Frank has certainly dampened our industry’s hunger for volume-driven commissions in commercial lending, banks still have huge opportunities to realign commercial relationship manager incentives with a CR2 focus. Most commercial loan officers have basic deposit funding goals (e.g. 25% of loan balances) but have little in the way of cash management, wealth and insurance incentives. By establishing both minimum thresholds and more significant upside for today’s lenders, banks can begin to break the credit-driven mentality, most especially among young bankers who will drive the business tomorrow. The most optimal situation is to create a true profit and loss statement by banker and align incentives around revenue/profitability growth versus volume or unit product growth.
5. Marketing and Branding – It’s odd that many banks focus strategically on Commercial relationships but their marketing function tends to focus on Retail banking or broad, boring community banking messages. Many commercial clients may not realize a bank has full-service offerings because they are not being provoked by clever and professional marketing tactics to build this awareness. Banks that use testimonials to profile how a client leveraged multiple product solutions gain more curiosity from customers and confidence from relationship managers. Additionally, banks like Silicon Valley Bank or Texas Capital Bank that promote their specialized expertise help create more of a high-brow relationship brand that helps combat the feeding frenzy of low-margin lending competition.
Commercial bankers are battling today in a heated, thin-margin business that may be extended even dreadfully longer in a slow global economy. Executives must address this blood bath by exposing the sheer magnitude of revenue potential that lies in the CR2 formula. Management must improve reporting and profitability tools, step up the knowledge and certification required of commercial bankers , realign incentive plans and kick marketing’s butt to make the commercial brand more full-service and edgy in its message. It’s not easy work, and it doesn’t happen overnight, but it beats the option of simply participating in a race-to-the-bottom of low-margin lending.
-SW