Banking Opportunities: Short-Term, Long-Term, and Ongoing

Today, opportunities abound to capitalize on a banku00e2u20acu2122s strengths and to build for the future, yet there is little doubt that many challenges exist. Sometimes it is helpful to undergo a reality check on where we are today.

For example, last year, bank earnings were at a record high, and yet today, the industry is facing a broad range of challenges. Here is a list of the usual suspects:

u00e2u20acu00a2 narrowing interest spreads

u00e2u20acu00a2 the inability to increase noninterest income to offset narrowing interest spreads

u00e2u20acu00a2 the bursting of real estate bubbles and the specter of credit quality problems

u00e2u20acu00a2 price competition that sometimes borders on the irrational

u00e2u20acu00a2 the cost and distraction of government regulation

u00e2u20acu00a2 the prospect of political power shifting from the Republicans to the Democrats

u00e2u20acu00a2 the growing perception that the federal government cannot be counted on u00e2u20acu0153to always get it right,u00e2u20ac whether at home or abroad.

I think that covers most of the hurdles currently confronting banks, except for the crises facing some bankers because of rising golf handicaps, the uncertainty of where Brad and Angelina will live, and disturbing new research linking increased weight to improper diet and the absence of exercise.The good news is that despite these obvious challenges, bank valuations continue to remain high.

Challenges create opportunities

Ironically, some of the greatest opportunities arise directly from the challenges facing other institutions. The classic example is how community banks, by continually improving personalized customer services to retail customers and small businesses, have risen in stature at the same time the large institutions have struggled to shake the perception that they donu00e2u20acu2122t care about customersu00e2u20ac”especially those of their recently acquired banks.

At the core of the challenge is that many customers believe megabanks are too big to worry about individual customers and their unique needsu00e2u20ac”particularly those of small businesses.This presents a clear opportunity for community-focused banks to simply say,u00e2u20acu0153We do care.u00e2u20ac Or as Frost Bank from San Antonio, Texas so eloquently puts it,u00e2u20acu0153Weu00e2u20acu2122re from here.u00e2u20ac What more do you need to say?

One caveat: Every megabank is working hard to u00e2u20acu0153get it right.u00e2u20ac Ultimately, some will, just as Wal-Mart under Sam Walton, Southwest Airlines under Herb Kelleher, and World Savings under Herb and Marion Sandler all got it right in terms of pricing, customer service, and return to shareholders. In addition to charismatic leadership, each organization focused only on markets or market segments where they knew how to win.

The challenge for many banks today is having too many choices, so focus becomes a priority.Yet, selecting one major opportunity on which to focus for the short term, the long term, and on an ongoing basis is a challenge in itself. Here are a few thoughts on each of these timelines.

The short-term opportunity: capitalizing on financial management

Financial markets are always changing, and investor perceptions about the valuation of banks can change dramatically and quickly.Yet changes in the valuation of bank earnings often have nothing to do with individual bank performance.

Today, financial management presents a number of clear, shortterm opportunities to build shareholder value for the following three reasons:

u00e2u20acu00a2 interest rates are historically low

u00e2u20acu00a2 valuations of many banks are close to historic highs

u00e2u20acu00a2 accessing the capital markets has never been easier for banks of all sizes.

The major financial management opportunities banks need to evaluate include the following:

Consider being acquiredu00e2u20ac”Valuations are exceptionally high in growing markets, often exceeding three times book value.Today, many acquirers will pay cash. Many sellers want to take cash. Hereu00e2u20acu2122s a thought: Evaluate whether selling at a historically high valuation, paying low capital gains taxes (which just might go up in the future), and having too much cash may have some merit. As a banking friend of mine once said, u00e2u20acu0153Having too much cash is like having too much runway.u00e2u20ac

Accessing public markets, whether for debt or equity, represents an excellent opportunity for banks wanting to raise capital or issue debtu00e2u20ac”Now is an excellent time to evaluate raising capital or issuing debt.The financial markets are receptive and pricing terms are attractive. Remember, newly raised capital or debt does not have to be spent or leveraged immediately. There will be another cycle when having capital strength will carry significantly more perceived value than it does today.

Sale/leaseback of bank facilities is exceptionally attractive right nowu00e2u20ac”This is true for three reasons. First, interest rates are low and very competitive. Second, real estate values, especially for bank-occupied facilities, are high (a bank is considered an excellent tenant).Third, institutional investor demand is very strong. For a bank, the sale/leaseback of some of its facilities converts a nonearning asset into an earning asset and builds capital.

The securitization of commercial real estate mortgages is following the pattern of the securitization of home mortgagesu00e2u20ac”Today, approximately $720 billion of commercial real estate mortgages have been securitized out of a total market of $2.8 trillion, or about 25%.This compares with 60% of the home mortgage market being securitized. Thus, those who hold commercial real estate mortgages with a minimum value of $1 million are finding a ready and competitive market in securitized portfolios.This creates a new product opportunity for all banks to fulfill their commercial real estate borrowersu00e2u20acu2122 demands for low, long-term, fixed-rate loans.

The bottom line is that now is an excellent time to carefully evaluate various financial management opportunities. The emergence of major investment banking companies focusing on financial services is enabling banks of all sizes to draw upon the very best investment bankers who understand their businesses and their needs globally, nationally, regionally, and locally.Windows of opportunity in the financial markets, especially those dependent on perception, have a history of closing rapidly and sometimes take a very long time to reappear.

The long-term opportunity: building customer trust and loyalty

Banking is a business built on customer trust and loyalty. If the trust is there, loyalty will follow. Ultimately, the value of the bank is primarily a reflection of the future cash flows from those loyal customers.

The priorities for building customer trust include the following:

Manage for the long-termu00e2u20ac”Focus on soundness, profitability, and growthu00e2u20ac”in that order. Strong, successful institutions build customer trust and loyalty.We all want to do business with people and organizations that are successful and trustworthy or, put another way, are worthy of our trust.

Do the right thingu00e2u20ac”Simply doing what the lawyers say is legal and in regulatory compliance should not be the final guideline for making decisions, however profitable they may be over the short term. As my friend Bill King recently said,u00e2u20ac It may be legal, but is it right?u00e2u20ac

Learn and track what your customers are thinkingu00e2u20ac”The objective is to expand or modify your products, pricing, promotion, and delivery channels. Quite simply, knowing what your customers want and anticipating their future needs contributes significantly to building long-term customer trust and loyalty.

Banking is a business and a public trustu00e2u20ac”The truly great bankers balance and combine building very successful businesses and building public trust in their institutions.

The ongoing opportunity: new ideas, insights, and innovative solutions

The most powerful resources for developing and implementing innovative solutions include the following:

Listening and learning from leading bankersu00e2u20ac”Take time to share and compare new ideas, insights, and innovation solutions with top bankers, ideally developing solutions with the best of the best.

Using only the best, most accurate, and timely informationu00e2u20ac”Measure in terms of quality, with less focus on quantity. For high-performance bankers, time is always at a premium.

Taking the time to think it throughu00e2u20ac”Find the time to think about alternative methods and how to implement innovative solutions within your bank.

And remember, having a network of excellent bankers who are actively contributing to one anotheru00e2u20acu2122s success can be both a source of innovative solutions and a powerful tool for validating oneu00e2u20acu2122s own thinking.

Conclusion: the short list

First, capitalize on your shortterm opportunities because they are often just that u00e2u20acu00a6 short term. Second, build customer trust and loyalty by doing u00e2u20acu0153the right things.u00e2u20acThis approach maximizes long-term shareholder value and feels much better than the alternative.Third, continue to look for new ideas and insights from the best bankers and best information sources, then take the time to carefully think about, explore, and evaluate innovative solutions. Build a network of bankers you respect. Most important, focus on achieving optimum results, not perfection.

In closing, I would like to share a statement by historian Joseph Campbell that I find to be particularly meaningful: u00e2u20acu0153The privilege of a lifetime is being who you are.u00e2u20ac

Many bankers I know have had the privilege of being who they are and, as part of who they are, have enabled others to enjoy that privilege as well. In the end, I believe banking is a noble profession because it allows others to achieve their dreams.