Our professional consulting experience indicates that most banks have opportunities to achive an increase earnings by 20% or more while gaining lasting competitive advantages. Most important, both objectives can and should be accomplished simultaneously. The key is to focus on what we call “earnings excellence.”
Earnings excellence involves capitalizing on the bank’s available resources to significantly boost current earnings while improving customer service quality. The guiding principle is to build a more profitable and customer-responsive bank without sacrificing the capacity to take advantage of future growth opportunities.
Major earnings improvements can begin significantly boosting the bottom line in less than six months. The process is very straightforward: First, identify the opportunities; second, develop a plan to capitalize on those opportunities; and third, implement the necessary changes. The long-term challenges will be to build the management information system, organization structure, and technology capability to grow the bank while continuing to maximize earnings.
Here are a few of the facets surrounding a program of earnings excellence:
Dramatically increased shareholder valueu00e2u20ac”By following this strategy, all shareholders, from institutional investors in money center banks to family members in community banks, don’t merely like the results, they love them. The reward to shareholders is dramatically increased shareholder value, because the earnings have improved significantly and the capacity to grow is firmly in place.
Rewarding managementu00e2u20ac”The financial rewards to management are often very significant in terms of direct incentive compensation tied to increased earnings. Quite frankly, this is as it should be, because senior management will have to enthusiastically champion and effectively manage the changes. These are achievable objectives but no easy task either. It’s like fishing, if it were easy it would be called “catching.”
Total commitment versus casual involvementu00e2u20ac” Make no mistake about it, change requires total commitment, especially by senior management and the board. Some CEOs can go it alone, but really making the bank “be everything it can be” requires a total commitment. It’s like the story about the difference between being involved versus being committedu00e2u20ac”as in a breakfast of ham and eggs: The chicken is involved, but the hog is committed. Perhaps this is a bad analogy, but it illustrates the point.
Combatting underperformanceu00e2u20ac”Sometimes there is an acknowledgement on the part of the board that there is an “earnings problem,” but the board doesn’t have confidence in the CEO’s ability to effectively manage the changes required to improve earnings. Couple all of the above with no management depth to speak of and no highly qualified new CEO knocking on the door, and the board is faced with a real dilemma.
The good news is that boards work through this problem of underperformance every day. It’s not easy, and the ultimate solutions vary from bank to bank, ranging from working around or with the current CEO to bringing in a new CEO. The bottom line from the board’s perspective is simply this: To fulfill their responsibilities to the shareholders, they have to address the problem of underperformance. One of the board’s responsibilities is the selection of senior management that in turn should deliver the earnings and growth performance. This may not necessarily lead to high performance, but at the very least, good performance will follow, given the available market opportunities.
At the end of the day there are relatively few good explanations that will satisfy informed stockholders concerning ongoing underperformance. On the contrary, stockholders are becoming both better informed about what constitutes a reasonable level of performance and much more effective in communicating their expectations.
The bottom line
The bank committed to achieving earnings excellence needs to focus on the following:
- developing an accurate opportunities analysis and in-depth understanding of what needs to be done to increase earnings
- finalizing action plans to accomplish its objectives over the next 12 months (Why wait any longer?)
- implementing programs that will significantly increase earnings and improve customer service long term
Our professional focus as a consulting firm is to enable banks to achieve their objectives as quickly and smoothly as possible. But make no mistake, senior management must really want to achieve earnings excellence and be ready to make a total commitment to implementation. Thus, no matter how clear the road to achieving earnings excellence may be or how many other similar banks have gotten there, unless senior management is totally committed to improving earnings, the goal will never be reachedu00e2u20ac”to the long-term detriment of shareholders. Finally, remember that all the analysis and planning in the world is only conversation until something gets implemented!
Reasons abound as to why the bank can’t or won’t take the simple steps to improve earnings ranging from “We can’t do it right now because (fill in the blank),” to being threatened by suggestions as to “There might be a better way,” to “Let the next CEO do it, I’m nearing retirement.”
Winning banks of the future
The “winning banks” in the future, whether they be nationwide banks, large regionals, or community banks, will have to excel in three areas:
- revenue growth
- earnings excellence
- risk management
How they get there will be a combination of leadership from the CEO, implementation of the right management systems, and attracting the right people. It all sounds so simpleu00e2u20ac”combine strong management leadership, with accurate information and knowledge, and then attract and retain the right peopleu00e2u20ac”and presto, you have a winning bank. Remember, however, winning in the future will require more management skill, more information, and fewer but more highly skilled and motivated employees than in the past.
The challenge to managementu00e2u20ac”The biggest challenge will be that the banking industry is entering a period of continuous change driven by technology, competition, and changing customer priorities. In addition, the stockholders, from institutional investors in large banks to family members in community banks, expect long-term earnings-per-share growth. For some bank stockholders, there is faint hope of their bank ever actually achieving that objective. For other bank stockholders, they will enjoy continued earnings growth and substantially higher valuations.
Changing stockholder expectationsu00e2u20ac”Continued underperformance with no clear plan to change is going to be viewed much less charitably than in the past. Strong bank management should be able to buy flat or down earnings for a year or two, if the bank is implementing a well-defined plan to achieve higher future earnings. By way of contrast, Internet companies seem to be able to project an eternity of losses and are rewarded with ever-increasing market capitalizations. (As an aside, my son, Alex, tells the story that based on current growth rates by the year 2002 the number of Internet users will finally surpass the number of people. Maybe that explains the Internet valuations.)
Success is within reach
The exciting part of banking today is that the information, experience, and technology to achieve earnings excellence are readily available. All it takes to win is the willingness to work at it. The management rewards can be significant and meaningful ranging from financial incentives to long-term career enhancement. (In a few instances this translates into career preservation.) The rewards to shareholders are clear: significantly increased shareholder value and the ability to either stay independent as a strong-earning bank, acquire lower performing banks, or merge at a substantial price premium over what a similar sized but lower earning banks can command.
Finally, the bottom line is that it’s always much more fun to be a high-performing bank.