What separates a top performing financial institution from others in the field? To find an answer, bank executives can take a cue from elite athletes, who consistently identify and perfect the discrete actions that will give them a competitive edge. To better understand just what banks leading their peers in growth are doing differently compared to lower performing institutions, Fiserv conducted a study that reviewed the performance metrics of banks with assets ranging from $1 billion to $10 billion. (Editor’s Note: This study was slightly different from Bank Director’s own Growth Leaders Ranking, which surveyed all banks and thrifts and ranked top growth institutions by core income, core deposits, noninterest income and loans and leases.)
We examined revenue, non-interest income, loan and core deposit growth over a year from September 2011 to September 2012. Then, Fiserv identified what factors distinguished the leading growth institutions within this group. Across the board, Fiserv research found that strong and growing banks maintained five key attributes: a strong cost foundation, sustained lending volumes, steady non-interest income, decreased reliance on service fees and proven motivation to capture market share.
Some of what Fiserv uncovered in our analysis of this segment was surprising. The leading growth banks were distributed across the country. While the institutions tended to operate in areas with strong local economies, these banks weren’t concentrated in any one particular region. The results did not point to one particular lending product strategy, either. Forty percent of the top performers with assets ranging from $1 billion to $10 billion had well diversified loan portfolios. Most of the remaining 60 percent were fairly equally represented in a number of lending categories, suggesting there are more factors at play than one particular focus.
So, what gives these leading growth banks such a powerful edge? Fiserv analysis revealed five factors that place elite performers in the winner’s circle:
- Strong cost foundation. A lower cost foundation lessens the risk required to generate revenues, and it’s one of the most significant influences on sustained profitability. Cost foundation is a unique metric calculated by adding interest expense and non-interest expense by average earning assets. The study revealed the leading growth banks not only excelled in generating revenue but were also efficient from a cost perspective in generating that revenue.
- It’s all about the volume. Top performing banks are simply lending more than their peers. For leading growth banks, total loans as a percentage of average earning assets was nearly 75 percent, compared to an average of 65 percent for all banks studied. But, while top performers lead with higher loan volume, it’s often done with some sacrifice to loan yield. This can be attributed to two factors: aggressive pricing and higher quality of loans.
- Optimized non-interest income opportunities. Leading growth banks generate more of their revenue from non-interest income opportunities than the typical bank. Core non-interest income made up nearly 24 percent of revenue for the top performers, significantly more than the 15 percent generated by their lower performing peers. This will be critical to all banks going forward as net-interest margins continue to be squeezed.
- Loan production fees over service charge fees. Thanks to greater regulatory scrutiny, highest performers in the study are relying less on service-charge fees to generate income. For all banks evaluated, approximately 34 percent of non-interest income came from deposit service charge fees compared to 17 percent for top performers. Instead, leading growth institutions are becoming decidedly more dependent on loan production fees, which include origination fees and gains on loan sales in the secondary market. The proportion of these fees to overall non-interest income is almost twice as much for top performers.
- Motivated to capture market share. Unsurprisingly, leading growth banks operated in markets that had a greater density of households and businesses (1,590 per square mile versus 715 overall). What is surprising, however, is that these high performing institutions do not have overwhelmingly strong market share. The average FDIC market share was just over 6 percent for all banks surveyed, but only 2 percent for leading growth banks. This shows that the top performers are competing fiercely in saturated markets.
In the quest to outperform and outgrow the competition, bank leaders can learn practical lessons from top athletes. Winning a gold medal is less about radical transformation and more about hyper-efficiency—finding the areas of performance where incremental and measurable improvements and adjustments can be made. To perform well in 2013, banks must be hyper-efficient. That means lending more while simultaneously finding new non-interest income opportunities, and capturing market share from the competition. Armed with a strong cost foundation and insight into opportunities of differentiation, banks can find their unique path to growth.