Learning Life’s Lessons. Again

Bankers love to preach prudence. Whether urging customers to save for a rainy day, or cautioning corporate borrowers about coming too close to their loan covenants, bankers play the dutch uncle role well.

They play it well, that is, until it comes to their own businesses.

Every few years a handful of the biggest banks get their fingers burned by their, well, their irrational exuberance. For a few quarters the analysts are excited about the shrewd nontraditional banks that are blazing new paths toward record profits from derivatives, third-world lending, the subprime market, whatever. Then, inevitably, it all falls apart. It’s a familiar tale, played over and over again in the banking industry.

Four words: Build your depositor base. The banks that do well, during good times and bad, are those with a large base of depositors who are the primary buyers of the bank’s other services. Right now, proven deposit gatherers like Bank of America and Citigroup and Fifth Third are seeing record growth and record profits. J.P. Morgan Chase and others who have been focusing on activities other than building their base of customers, aren’t doing so well.

Five recent headlines should tell you something:

“BofA Makes Good on Small Biz Vow”

Bank of America doubled the number of small business loans it made in 2001 from what it made in 1999, unseating Fleet Financial as the top small-business bank nationally. At the same time, BofA announced its current initiatives: Getting out of the subprime lending market and focusing resources on improving the quality of its service. Lesson: Small businesses are plentiful and potentially profitable, and small businesses and retail customers use lots of services on which banks make big profits.

“Efficiency Gap Separates Big Banks from Small”

Without a base of customers, technology costs are spread over too few customers, making for a large “efficiency gap.” Most big banks, even medium-sized banks, according to the OCC, are spending less than 50 cents to generate a dollar in earnings. Banks under $100 million, on the other hand, tend to spend more. What’s the quickest path over $100 million? It’s not buying deposits and lending aggressively with the funds. It’s growing your depositor base and selling products to it.

“JPM Chase Hits New Low, Pressure on CEO Mounts”

Let’s see, wasn’t J.P. Morgan Chase everybody’s darling because of its savvy private equity deals and its bold lending to the telecommunications and technology industries? Now its stock sells below book, down 60% or so from last year’s highs. Remember when it was a horse race between Citibank and Chase for the hearts and minds of New York consumers? That race is over.

“Royal Bank of Scotland Pays Big for Philly Target”

When you build a great franchise, it not only impacts your stock price, it’s the only way you’ll ever command a high price from an acquiror. Commonwealth had a healthy share of the retail banking market in Philadelphiau00e2u20ac”enough so that a Scottish bank was willing to pay a 65% premium in the stock price to Commonwealth shareholders, a little over three times book for the bank. Today, like never before, acquirors aren’t buying earnings; they’re buying market share and franchises that control markets.

“Gramm Takes Job at UBS Warburg”

Okay, I know this has nothing to do with growing deposits, but I just had to throw it in. The folksy senator from Texas will retire from Congress with a nice pension, and then he’ll become the newest vice chairman for that really big global bank from Switzerland. Think he’ll be involved in governmental relations after his one-year legal prohibition against lobbying expires? The bank declined to say.

When are we going to become outraged at public officials with exit strategies worthy of Enron execs? Oh, here’s a quote from UBS Warburg CEO John P. Costas: “We have hired Senator Gramm for what he knows, not who he knows.” Right.