There used to be a perception that bankers found it tough to innovate because they are largely left-brained, meaning they tend to be more analytical and orderly than creative right brainers. While this may have been true for the founding fathers of this industry, there’s no question that bankers have been forced into creativity to remain competitive.
It could have been happenstance, natural evolution, or the global financial crisis of 2008 — it doesn’t matter. Today’s bankers are both analytical and creative because they have had to find new, more convenient pathways to profitability and use those insights for continuous coaching.
The current economic landscape may require U.S. banks to provision for up to $318 billion in net loan losses from 2020 to 2022, the Deloitte Center for Financial Services estimates. These losses are expected to be booked in several lending categories, mainly driven by the pandemic’s domino effect on small businesses, income inequality and the astounding impact of women leaving the workforce pushing millions into extreme poverty. Additionally, net interest margins are at an all-time low. Deloitte forecasts that U.S. commercial banks won’t see revenues or net income reach pre-pandemic levels until 2022.
In the interim, bankers are still under pressure to perform and increase profitability. Strong performance is possible — economic “doom and gloom” isn’t the whole story. In fact, the second-largest bank in America is projecting loan growth in 2021, of all years, after six years of decline. These industry challenges won’t last forever. so preparation is key. One of the first steps in understanding profitability is establishing if your bank’s business model is transactional, relational or a mix of the two, then answering these questions:
- How much does a loan pay for the use of funds? How much does a deposit receive for the use of funds?
- How much does a loan pay for the current period and identified level of credit risk?
- How much capital does the bank need to assign to the loan or deposit?
- What are the appropriate fees for accounts and services used by our clients?
- What expenses are allocated to a product to determine its profitability?
There should never be a question about why loans need to pay for funds. The cash a bank provides for a loan comes from one of three sources: capital investments, debt and borrowing or client deposits.
From there, bankers have shown incredible creativity and innovation in adopting simpler, faster ways to better understand their bank’s profitability, especially through sophisticated technologies that can break down silos by including all clients, products and transactions in a single database. By comparison, legacy databases can leave digital assets languishing in inaccessible and expensive silos. Bankers must view an entire client relationship to most accurately price the relationship.
This requires a mindset shift. Instead of thinking about credit structure — the common approach in the industry – to determine relationship pricing, think instead about the client relationship holistically and leave room to augment as necessary. Pricing models should reflect your bank’s profitability calculations, not adjusted industry average models. And clients will need a primary and secondary owner to break down silos and ensure they receive the best experience.
How does any of this drive optimal banker behavior? A cohesive, structurally sound system that allows bankers to better understand profitability via one source of the truth allows them to review deal performance every six months to improve performance. Further, a centralized database allows C-suite executives to literally see everything, forging connections between their initiatives to banker’s day-to-day actions. It creates an environment where bankers can realize opportunities through execution, accountability and coaching, when necessary.