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Bank Think Blog
Influx of Capital May Be Reason for Optimism, May 13, 2010
Also available on American Banker's online blog page, no login required.
The Bottom Line Blog
A Hard Hit to Banking's Bottom Line
Implications of a Prolonged Low-Rate, Low-Growth Economy, June 17, 2010
Who's Worried About Revenue Growth?, April 20, 2010
There Will Be No Return of Glass Steagall, Feb. 23, 2010
Revenue Opportunities in 2010, Jan. 26, 2010
Marketer of the Year for 2009? A Car Company?, Nov. 10, 2009
The Blogosphere: "All Banks Are Evil", March 18, 2009
Reputational Risk: Banking's Tarnished Image, Feb. 6, 2009
Helping Your Customers Rebuild Confidence, Jan. 9, 2009
Relationship Banking: Time to Walk the Walk, Dec. 18, 2008
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A Hard Hit to Banking's Bottom Line
Posted June 23, 2010 | by Mary Beth Sullivan
The various proposed regulatory changes entail the imposition of higher capital requirements, reduced fee income, and restrictions to operating powers. CPG analysis shows that regulatory changes, absent an increase in revenue, will cause average ROEs to fall 260 basis points (and probably higher as our estimates tent toward conservative in many cases). When compared to the 2006 median ROE for the industry of 13% (hard to look at ROE since 2006), this translates to a 20% drop - quite a hit to banking's bottom line at a time when the U.S. economy and especially main street businesses need the banking sector more than ever. Our analysis doesn't reflect the likelihood of higher FDIC insurance assessments and compliance costs which will further erode bank profitability. Banks will need to get busy to create new value propositions and improve efficiency to replace lost income.
Implications of a Prolonged Low-Rate, Low-Growth Economy
Posted June 17, 2010 | by Mary Beth Sullivan
I was invited to speak about the future of community banking at an investor conference this past weekend. Several economists also participated, as well as regulators and investment bankers. Of particular interest was the shared opinion of the economists: this low interest rate environment will endure through 2010 and beyond. If you work with or in a banking company that is positioned to benefit as rates rise, you may have to wait a while. In the meantime, credit demand even with low rates remains extremely weak; mortgage foreclosure and delinquency rates have yet to peak; and, while business and consumer spending show some signs of life, they remain weak by historical standards. What's a banker to do?
We expect to see increased merger activity among weak and healthy banking companies; a greater sense of urgency on cost reduction and outsourcing; and resources shifting toward growth opportunities incl
For more information about the state of the economy nationally or in your region or to discuss your business plan and how it can be strengthened, email me at msullivan@capital
Influx of Capital May Be Reason for Optimism
Posted May 13, 2010 | Mary Beth Sullivan and Claude Hanley
It is easy to be discouraged about the prospects for the industry’s return to normal levels of profitability. Each day seems to bring a new brainstorm from elected representatives, industry pundits, or ex-regulators aimed at addressing a perceived problem with the industry that needs to be fixed. Invariably, the proposed solutions entail - implicitly or explicitly – imposition of higher capital requirements, higher compliance costs, or restrictions to operating powers.
The list of proposed fixes is long. To cite a few: creation of a Consumer Financial Protection Agency/Bureau, systemic risk oversight, expanded resolution authority, changes to FDIC assessments, increased capital and liquidity levels, restrictions on proprietary trading, restrictions on asset-backed securitizations, and derivatives reform. The thought of complying with these changes is simply dizzying, as is the associated degree of uncertainty they create about the future of the industry. The ongoing debate has many bankers wondering what else lurks around the corner.
Rarely are concerns voiced within public policy circles about the implications that these proposals might have on industry competitors to fulfill their primary purposes: to act as financial intermediaries to facilitate the efficient allocation of capital and credit.
Banks must have capital to fulfill this role. To attract this capital, banks must be able to earn an attractive return for investors. But the fixes proposed for the industry, together with previous fixes such as the Card Reform Act and the regulations on overdraft fees, raise well-founded concerns about industry profitability going forward.
Many banks have already cut costs, so there is limited ability to offset negative financial effects of proposed fixes through expense reductions. Our analysis shows that the fixes, absent an increase in revenue, will cause average ROEs to fall into the single digits.
Yet with all the uncertainty and mischief being caused by actions in Washington, banks and thrifts continue to succeed in attracting capital. According to SNL, banks and thrifts raised $11.4 billion in common equity from Jan. 1 through May 10 as more institutions seek to repay TARP, cover loan charge-offs, or to facilitate M&A activity. Unlike in 2009, the capital raises are not restricted to big banks. Community banks and regionals have participated as well.
Synovus Financial Group, plagued by problem residential development loans in the southeast, raised $1.1 billion in capital last week, so these capital raises cannot be attributed to investors seeking to benefit from a presumption of a Too Big to Fail policy. In additional to the public capital raises, there are recent instances of private equity funds making investments in community banks.
Why are investors placing capital into the banking system? Admittedly, investments to date have been made on terms attractive for investors. Also, some of the capital is likely being invested on expectations of quick paybacks through M&A activity. But our sense is that investors must also believe that the industry will be able to generate competitive returns in the not-too-distant future. The challenge will be for bank management to figure out how to make that happen.
Who's Worried About Revenue Growth?
By Mary Beth Sullivan in The Bottom Line on Tuesday, April 20, 2010 11:38 AM
With May and June right around the corner, months when many banks hold executive and board retreats and many state bank associations host their annual meetings, I thought I'd comment on what I don't see on many of these agendas: new ideas. You might think a state's annual meeting agenda in 2010 would look very different from the agenda of the 2006 meeting - but you'd be wrong in most cases. Discussions on balance sheet management, H/R issues, economic forecasts, and regulatory issues will still dominate most meetings. These are important topics to be sure, but they aren't very inspirational or motivational. And banks need to motivate in the direction of building new sources of revenue, especially fee revenues based on real value-added features, design, integration capabilities, etc. I am especially worried about the future for those banks who feel that back to the basics (taking deposits, making loans, and managing risk) will be enough to ensure viability over the long term. It won't be: already over 50% of lending in the U.S. is done outside the traditional banking system, and margins in the intermediation business are in a long-term state of decline. At the same time, a lot of customer needs are going unmet. It's time to put some fresh thinking into the discussion on such topics as retirement, new insurance products, P2P payments, the future of bill payment, getting paid for advice, the next generation of debit cards, making the mobile channel into a real revenue generator, etc. I don't see these topics on many agendas, but I hope banks of all sizes are spending time brainstorming, designing, and developing new products, services, and ways of reaching customers and prospects. Without new sources of revenue, it's hard to see how banks will be able to generate sufficient returns for shareholders in an era marked by higher costs and a tepid economic recovery.
Let me know what you think and what other opportunities you see for 2010.
There Will Be No Return of Glass-Steagall
By Mary Beth Sullivan in The Bottom Line on Tuesday, February 23, 2010 3:01 PM
The New York Post reports today that The Obama Administration is going to drop its plan to ban proprietary trading for commercial banks and instead require that commercial banks hold higher cash reserves if they engage in property trading. I'm sure the devil will be in the details on this, and I'd prefer to see the whole idea scrapped. Still, this watering down of the "Volcker Rule" is a welcomed relief. The dangers of mixing commercial banking and investment banking have been exaggerated. As many of you know, Senators Maria Cantwell (D-WA) and John McCain (R-AZ) have introduced a bill that would essentially reinstitute the Glass-Steagall Act. While the Obama administration claims to be against a full resurrection of the act, the President proposed the “Volcker Rule,” stating that “banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers.” Both of these proposals rely on the premise that risky practices of investment bankers on Wall Street caused the current economic contraction in the same way that they caused the Great Depression; and that reinforcing the separation of investment banking and commercial banking will go a long way to prevent a future financial crisis.
This premise is simply untrue. The most recent financial crisis - much like the Great Depression - was not caused by risky proprietary trading or the losses of hedge funds operated by commercial banks, and the elimination of these vehicles would have done nothing to prevent the credit problems that sank so many financial institutions. Eliminating proprietary trading at banks would have done little to accomplish its stated goal of decreasing systemic risk and helping to prevent another financial meltdown. Instead, banks and policy makers should focus on improving risk management, internal controls, corporate governance, and supervisory oversight.
Let me know what you think.
Revenue Opportunities in 2010
By Mary Beth Sullivan in The Bottom Line on Tuesday, January 26, 2010 1:39 PM
2010 will continue to be a tough year for the banking industry. Just how tough might become more clear during tomorrow night's State of The Union Address. Still, there are revenue growth opportunities out there including:
1. Turning new deposits into revenue growth opportunities. Today's American Banker includes an article on deposit growth at banks, stating that deposits grew at an average rate of 8% in the fourth quarter versus the third quarter at large banks - a continued massive increase in deposit inflows into the banking system. Turning these new customers and new dollars into opportunities for revenue growth will be a challenge. Strong onboarding processes coupled with incentives for debit use are a must. In addition, banks need to break down traditional barriers between their retail banking and investments businesses to make it far easier and more seamless to move money into higher yielding, higher return instruments as rates rise and the market continues to rebound. And, of course, growth in consumer and business lending at these banks would help, but economic and other pressures will continue to dampen demand and dampen the appetite for lending at many institutions. Having said that, consumer confidence is beginning to rise - and I see opportunity #2 being:
2. Meeting consumer lending needs of good (but not great) credit customers. Demand for consumer credit will be most robust where credit has been restricted in recent months - through credit line reductions, changes in terms, and the like. Many consumers and small businesses - even those with good credit histories - are being alienated by their credit providers. Those individuals and businesses with stellar credit will likely have more options going forward, but there's good money to made lending to others who have good credit histories but perhaps some circumstance that modeled them into a category for cutback or term changes recently.
3. Retirement planning - and the investment and wealth management strategies that go with this. This remains a huge opportunity. Witness BofA's announcement this week that it will launch a $20 million ad campaign "help2retire" targeting the retirement market. The sheer size of the market makes it attractive (more than $24 trillion in assets), but recent turmoil on Wall Street makes the opportunity even more attractive as it leaves the door open for banks to regain some of the business lost to investment firms over the last 20 years. I could go on - there are many other opportunities out there.
Let me know what you think and what other opportunities you see for 2010.
Marketer of the Year for 2009? A Car Company!
By Mary Beth Sullivan in The Bottom Line on Tuesday, November 10, 2009 2:36 PM
I just read in AdAge that their Marketer of the Year Award for 2009 is going to Hyundai - with 40% of readers selecting the carmaker. What Hyundai did in 2009 was brilliant: offer customers who finance or lease a car and then lose their income the option to return it with no impact to the customer's credit standing. To my knowledge, only one bank copied this idea: BBVA Compass. Compass offered free involuntary unemployment protection to new mortgage customers - lose your job, and Compass will pay your mortgage for up to a year. Great idea - and they got it from Hyundai!
What else can be learned from this AdAge's runner up companies? What tactics might be copied by savvy bank marketers looking to distinguish themselves from everyone else? McDonald's won runner up honors in part by appealing to mothers - not the folks who buy Big Macs, but the people who make the decision to drive through the drive-up window. Women and mothers increasingly make the financial decisions for households in the U.S. What are banks doing to appeal directly to this buyer group?
There are always lessons to be learned by looking outside the banking industry. Marketer of the Year (AdAge), Most Innovative Company of the Year (Fast Company), and other retail/marketing oriented annual honors should be followed and studied for ideas that have proven success.
If you know of other bank offers that demonstrate a keen understanding of today's trends, let me know!
The Blogosphere: "All Banks Are Evil"
By Mary Beth Sullivan in The Bottom Line on Wednesday, March 18, 2009 8:52 AM
On Monday, Aaron Patzer, Founder and CEO of mint.com, gave a speech as part of a panel on Finance 2.0 (http://sxsw.com/interactive/talks/panels/?action=show&id=IAP0901297). The panel spoke to the issue of saving the younger generation - presumably from the evil banks, as no banks took part or were likely even invited to the event. Patzer, during his speech, is quoted as having said, "Most banks are evil." This has generated some significant buzz in the blog world; Patzer even had to respond with a blog post of his own to try to qualify his statement (see article on the panel discussion in the following link; be forewarned that comments on this article in this blog site, should you choose to view them, contain some harsh language as these comments are not "edited")
http://rawstory.com/news/2008/All_banks_are_evil_says_money_0317.html.
Patzer has an interesting business and has garnered a substantial following among Gen Y consumers. Bankers need to worry a great deal about this type of message and the speed with which it travels throughout the socially networked world. Bankers need to get plugged into the conversation and do so with an intent to learn something about bringing value to a new type of consumer.
Do any of you feel plugged in? Let me know.
Reputational Risk: Banking's Tarnished Image
By Mary Beth Sullivan in The Bottom Line on Friday, February 06, 2009 2:43 PM
There's a movie due out later this year in which the bad guy is - you guessed it - a bank. The International will feature an Interpol agent (Clive Owen) and the Manhattan District Attorney (Naomi Watts) working together to uncover all manner of illegal activities at a particular international bank - including money laundering, arms trading, and the destabilization of governments. Good grief. You can count on Hollywood to demonstrate a keen understanding of the average American consumer's mindset right now. http://www.imdb.com/title/tt0963178/plotsummary
But what about the banking industry itself? Where is the voice of the industry in all this? While individual banks are working overtime to communicate with customers, employees, and shareholders, there seems to be no unified voice for an industry that is in crisis and risks permanent reputational damage.
Banks, and especially community banks, have long been perceived by customers as relatively trustworthy. With this reputation in jeopardy, what are the industry's biggest advocacy groups doing? Where's the ABA, ICBA, Financial Services Roundtable, etc.? I appreciate these organizations are spending countless hours fighting individual pieces of proposed legislation on Capitol Hill - and rightly so. But there is a bigger battle to be fought as well.
In New York, one is often asked "what do you do"? which, translated, means "where do you work"? Bankers who are still employed are resorting to lying so as not to be subjected to an onslaught of anguished criticism. I'm not making this up; people are mad, and they are taking it out on all banks and all bankers, even those who had nothing to do with the mess we're in now. It's time for the industry's leading advocacy groups to step up and address proactively (as best as possible) issues that are tarnishing the industry's good name. Remember, we're talking about an industry that leads all other industry sectors in the US in monetary donations to community and nonprofit organizations ($1 billion in 2007)!
I've been a banker or consultant to the industry for my entire career, and I have no intention of lying about that at a cocktail party. Unlike John Thain, I don't have a $35k commode in my office (http://www.thedailybeast.com/blogs-and-stories/2009-01-22/john-thains-top-16-outrages/). We need our industry advocacy groups to get in front of this reputational tsunami.
Helping Your Customers Rebuild Confidence
By Mary Beth Sullivan in The Bottom Line on Friday, January 09, 2009 9:49 AM
With the consumer confidence index posting an all time low in December, I decided to spend time this morning searching the internet for examples of interesting things being done by banks to help their customers in this time of great economic crisis. I didn’t find much. The federal government, our country’s accounting profession, and even advertisers are doing interesting things in this regard – but not banks. This makes no sense, especially when there are some incredible (and free) resources out there that any bank can leverage.
If a bank viewed itself as a provider of information and financial solutions, and not a product sales company, I’d expect to see the bank making its clients aware of these resources. Sadly, I found not one such example (though, perhaps, some exist). Bankers take note of the following resources/information that you might consider making available to your customers.
http://www.mymoney.gov/ . This U.S. Treasury Department site is loaded with information to aid consumers in understanding, saving, and better managing money.
http://www.360financialliteracy.org/ . The American Institute of Certified Public Accountants created this site – very user friendly, and it links to one of my favorite financial literacy websites: http://www.feedthepig.org/ .
AICPA teamed up with The Advertising Council on this. http://www.jumpstart.org/jump$tart-clearinghouse.html . The JumpStart Coalition has great set of resources available in its Clearinghouse.
Sadly, when searching individual bank websites with terms including “money management tips” and “help me save money”, I was usually directed to a bank product description or offer. Sometimes I was directed to the bank’s financial calculators – but these aren’t what I wanted either. Some banks are beginning to build on the concept of being the go-to place for consumer financial information and automated tools, but for now, there are too few examples. Check out Wells Fargo’s Hands on Banking: http://www.handsonbanking.org/en/ . Parts of this site are still under construction, but there’s a solid foundation in place.
Relationship Banking: Time to Walk the Walk
By Mary Beth Sullivan in The Bottom Line on Thursday, December 18, 2008 10:23 AM
Most banks have long stated as a primary element of strategy that they are in the business of building customer relationships. But saying it and doing it are two very different things.
Relationship pricing, product bundling, and the like have proven somewhat effective in garnering multiple account relationships from customers, but we still find many banks with low cross-sell rates and a large number of single service customers. With the economic challenges many customers face today, it's time to rethink the concept of relationship banking.
A relationship is forged on mutual trust. It's characterized by open and often frequent communication. In this time of great economic challenge for millions of consumers across the country, banks have a tremendous opportunity to step up to the plate and become the source for information, assistance, and solutions.
Pull consumer credit back into the relationship discussion. Credit card companies have been rushing to freeze lines and raise rates in advance of regulatory intervention by the Fed. With credit and debit cards now central to how consumers pay for just about everything, there is an unprecedented opportunity for many banks to get back into the credit card business with a focus on how the card fits into the overall customer relationship - not how the card as an individual product can be profitable. Same goes for auto loans and mortgages. Yes - losses on these portfolios are climbing (and so credit unions are also hurting). But customers with good credit histories who can repay will still need to buy cars, buy homes, and pay for things (with the convenience that only a card offers)!
Get proactive about customer advocacy. From the CEO to the teller, the message now needs to be: we can help and we will work with you to get you back on your feet. Building relationships now means taking the time to sit down with customers, review in detail their current situation, and help them set goals and identify strategies to rebuild. And that leads us to:
Shift incentives toward service. In this environment, front line staff in the branches should be encouraged to spend time talking to customers without the conflicts that arise when they have stretch sales goals to meet. It can't be about what the staff can sell the customer; it has to be about how they can help the customer.
Put a big push on PR and communication and do it NOW. Get the word out that your bank is THE place to go for information, assistance, and solutions. The investments banks are gone; many big banks are pre-occupied with merger integration issues; large credit card originators are rushing to raise prices before the Fed acts; U.S. economic news remains grim; and consumers are focused on the security of their financial providers, not price. There is an unprecedented opportunity for traditional banks to build share by re-energizing the relationship banking model - but you need to act now!
Could a Bank that Helps its Customers Save Money Win Substantial New Business in This Market?
By Mary Beth Sullivan in The Bottom Line on Monday, November 03, 2008 11:44 AM
While many banks are continuing to experience significant earnings and growth challenges as a result of the current environment, some banks claim to be winning new business – and their third quarter earnings results support this. In markets where institutions have failed (Wamu; Indymac and fifteen other bank failures since January), competitors have won new clients and grown deposits and loans. For most banks, however, growth in new customers and balances has been flat or negative in recent months. And yet, I talk with bankers every day who think there should be an opportunity in this market for conservative and well-run traditional banks to build new client relationships. If that is true, and I believe it is, what needs to happen to get consumers and small businesses to move?
Here’s a new idea: reduce or eliminate fees. Consumers are extremely anxious about the economy and their jobs, and many have lost great sums of money in the stock market. How have banks responded? Bankrate.com’s 2008 survey shows a record high year for fees assessed in a variety of categories, including ATM and bounced check fees. In many cases these fees make sense from an individual account profitability standpoint. But what about the client relationship overall? Why not, instead of raising fees, reduce or eliminate many of them and provide guidance to clients on how they can avoid other charges, earn more interest, renegotiate loans, etc.? Why not give clients the information and tools they need to better understand how they can save money? There is a tremendous opportunity to put the customer first and help them weather the current economic situation by helping them improve their savings habits and reduce expenses. If banks don’t step up to this challenge, someone else will.
