Gaining Ground in Uncertain Times

The economy remains uncertain, creating opportunities and threats for banks and their business clients alike. The question is whether to proactively embrace and leverage the opportunity that change brings or passively allow the markets to dictate your future.

Proactive management of commercial and industrial (C&I) loans, real estate loans and other borrowers reveals opportunities and threats early and provides a competitive advantage.

Banks embracing this customer-focused approach not only increase income but also increase the value of every dollar spent on credit and risk cost. Further, this approach turns those expenses into investments in revenue growth, transforming the efficiency ratio and creating more tools to manage regulatory requests.

Banks can thrive in this new normal with five decisive steps that give them more control and even a proactive advantage in today’s challenging environment. The steps are:

• Securing the data process. Proactive approaches begin by understanding what data is collected and updated, how, on what schedule and if it is sufficient.
• Considering external factors and company data. What are the external factors and sources that affect each individual borrower?
• Monitoring the market. Regularly referencing the factors that inform decision making and providing additional insights, even when companies aren’t sharing data.
• Removing duplicates. Relationship management and credit and risk management are usually duplicating efforts and may let some things fall through the cracks.
• Mapping the customer base. Who should be talking to whom?

Banks should be actively tracking the company’s own information and monitoring the business’s external drivers to maintain a complete picture of what’s going on. In the 2007-2008 financial crisis, every bank failure report from the Federal Deposit Insurance Corp. cited that the bank didn’t know the real condition of its loans.

Knowing the true state of C&I and real estate loans is a defensive and offensive act. It’s not the regulators that will kill a bank in uncertain markets — it’s the business environment. For instance, a bank may try and keep all its loans listed as performing, but if a business runs out of money and the bank didn’t know until the first missed payment, then the loan wasn’t really high quality.

This happens all too often. The head of special assets can’t do much with a bankrupt business, but knowing that a commercial borrower has six months of runway creates several options. By proactively managing the threats to the borrower and the loan, the bank can create opportunities for the borrower and the bank as well.

If a key ingredient increases by 10% in price in 30 days, that should prompt a call from the relationship manager to the chief financial officer, not only to check in, but also to add real value with pre-authorized amendments to the line of credit — possibly at a higher price or for a given duration — to help them bridge to a new plan.

Taking this holistic approach benefits not only the bank but also the customer. At the customer level this approach:

• Increases customer stickiness.
• Provides a level of information to competitively price loans because the potential for loss is reduced compared to normal portfolio management.
• Provides opportunities to upsell bank and external products and services that increase customer and bank value.
• Provides opportunities to network clients and create shared and community value.

Many people anticipate, and in some cases are even numb to, the constant change in the markets. Banks must capitalize on this ever-changing environment and use it to make the necessary moves to outpace competition. This is the time to make those changes to substantially improve service, create distance from your competitors and increase value with minimal perceived disruption.