The Corporate Banking Conundrum and the Massive Digitization Opportunity

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Corporate banking makes up nearly a third of the average bank’s total lending operations. So, it is surprising that institutions don’t consider it among their core banking activities, especially given the need to digitize their front and back-end processes.

Corporate banking encompasses a large portfolio of services, including cash management, trade finance, risk management, transaction services and corporate finance services. At some banks, nearly 20% of their underlying book value is dedicated entirely to corporate banking activities. There are many moving pieces, which can make it difficult to optimize and digitize, especially for banks with a large number of corporate clients.

Corporate onboarding is an important and highly complicated process, with unique complexities for each bank. From the corporate customer perspective, the time needed to onboard, resolution turnaround time and customer experience are the most valuable areas — and require the most improvement. According to a recent Fenergo survey, 81% of bank C-suite executives believe poor data management lengthens onboarding and negatively affects customer experience. Improving how banks onboard corporate clients has a variety of benefits.

  • Reduce Time-to-revenue: Banks are keen to onboard new customers quickly to maximize income and profit. A faster setup means greater potential for revenue generation through various lending products.
  • Improve Customer Experience and Loyalty: An efficient customer onboarding process is crucial to secure loyal, lifelong relationships with corporate clients.
  • Streamline and Standardize Compliance: Anti-money laundering, Know Your Customer and other regulatory compliance obligations can be effectively automated internally and cross-country.

From a bank’s perspective, getting the right information, accounting for risk, and managing customer lifecycles is not only important – it is a differentiator. But we still find, right from the start of the customer journey, that tasks are excessively manual and turnaround time is alarmingly long: lacking even the most basic digital optimization, it can take between 90 and 120 days for corporate customer onboarding.

In corporate banking, a key area of concern is time. The traditional model of account onboarding and relationship management is far too labor intensive: collecting documents and navigating through tedious elements of their bank’s internal process flows, among other tasks. This time could be used for  meaningful and insightful interactions with the clients and enabling transaction for the customer.

Digitizing onboarding processes allows RMs more time to interact with clients. Digital channels can provide additional ways to connect with and closely serve clients. Applying artificial intelligence (AI) and machine learning (ML) to administrative and analytical tasks not only improve RM productivity, but provide a new perspective on customer service.

Digitized information leads to digitalization of the entire corporate onboarding process. Relationship portfolio management is the glue that holds it all together.

How to Attack the Corporate Banking Behemoth

Step 1: Adopt a digital technology framework to deliver end-to-end digitalization across customer lifecycle. This allows the bank to capture information from unstructured and structured sources using optical character recognition software (OCR), among other software solutions. As a result, making this information available digitally across stakeholders.

Step 2: Remove the friction between bank data sources, then automate the process flow with lean principles. This helps ease data enrichment by addressing any adverse or inadequate information upfront.

Step 3: Be proactive and manage risk.

Risk management has changed substantially over the past decade. Regulations that emerged from the global financial crisis and levied fines triggered a wave of change in risk functions. These included more detailed and demanding capital, leverage, liquidity, and funding requirements, as well as higher standards for risk reporting.

For risk functions to thrive during this period of fundamental transformation, banks need to proactively rebuild them. To succeed, banks must start now with a portfolio of initiatives, such as digital underwriting, the incorporation of AI and machine learning techniques and interactive risk reporting, that align short-term business cases with the long-term target vision. These improvements should be complemented by a shift in recruiting toward more technology-savvy profiles or the introduction of data lakes.

Prioritize natively integrated systems and gain deep insight into the portfolio with real-time metrics reflecting transactions, positions and risk exposure data. Slash costs by simplifying legacy systems, taking SaaS beyond the cloud, and adopting robotics and AI. Build technological capabilities that force the bank to be more intelligent around customers’ needs. Look for more advanced analytic tools with best-in-class road mapping and reporting functionality.

Banks are scrambling to catch up to the emerging demands of consumers in this digitally driven and rapidly evolving ecosystem. The commercial banking space has been buzzing around advancements in digitizing and automating processes, with clear benefits to boast. It’s time corporate banking joined them.

By 2025, risk functions in banks will need to be fundamentally different than today. The next decade in risk management may be subject to more transformation than the last one. Unless banks act now and prepare for these longer-term changes, they will continue to find themselves overwhelmed by new requirements and emerging demands.

Banks Have Started Recording Goodwill Impairments, Is More to Come?

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A growing number of banks may need to record goodwill impairment charges once the coronavirus crisis finally shows up in their credit quality.

A handful of banks have already announced impairment charges, doing so in the first and second quarter of this year. Some have written off as much as $1 billion of goodwill, dragging down their earnings and, in some cases, dividends. Volatility in the stock market could make this worse in the second half of the year.

“It was a very hot topic for all of our financial institutions,” says Ashley Ensley, a partner in DHG’s financial services practice. “Everyone was talking about it. Everybody was looking at it. Whether you determined you did … or didn’t have a triggering event, I expect that everyone that had goodwill on their books likely took a hard look at that amount this quarter.”

Goodwill at U.S. banks totaled $342 billion in the first quarter, up from $283 billion a decade ago, according to the Federal Deposit Insurance Corp.

Goodwill is an intangible asset that reconciles the premium paid for acquired assets and liabilities to their fair value. It’s recorded after an acquisition, and can only be written down if the subsequent carrying value of the deal exceeds its book value. Although goodwill is an intangible asset excluded from tangible common equity, the non-cash charge can have tangible consequences for acquisitive banks. It immediately hits the bottom line, reducing income and, potentially, even capital.

Several banks have announced charges this year. PacWest Bancorp, a $27.4 billion bank based in Beverly Hills, California, took a charge of $1.47 billion. Great Western, a $12.9 billion bank based in Sioux Falls, South Dakota, took a charge of $741 million. And Cadence Bancorp., an $18.9 billion bank based in Houston, Texas, recorded an after-tax impairment charge of $413 million.

Boston-based Berkshire Hills Bancorp announced a $554 million charge during its second-quarter earnings that wiped out all its goodwill. The charge, combined with higher loan loss provisions, led to a loss of $10.93 a share. Without the goodwill charge, the bank would’ve reported a loss of only 13 cents a share.

“The primary causes of the goodwill impairment were economic and industry conditions resulting from the COVID-19 pandemic that caused volatility and reductions in the market capitalization of the Company and its peer banks, increased loan provision estimates, increased discount rates and other changes in variables driven by the uncertain macro-environment,” the bank said in its quarterly filing.

Goodwill impairment assessments begin by evaluating qualitative factors for positive and negative evidence — both internally and in the macroeconomic environment — that could cause a bank’s fair value to diverge from its book value.

“It really is not a one-size-fits-all analysis,” says Robert Bondy, a partner in Plante Moran’s financial services group. “Just because a bank — even in the same marketplace — has an impairment, it’s hard to cast that shadow over everybody.”

One reason banks may need to consider impairing their goodwill is that bank stock prices are meaningfully down for the year. The KBW Regional Banking Index, a collection of 50 banks with between $9 billion and $63 billion in assets, is off by 33%. This is especially important given the deceleration in bank deals, which makes it hard to evaluate what premiums banks could fetch in a sale.

“[It’s been] one or two quarters and overall markets have rebounded but bank stocks haven’t,” says Jay Wilson, Jr., vice president at Mercer Capital. “You can certainly presume that the annual impairment test, when it comes up in 2020, is going to be a more robust exercise than it was previously.”

Banks could also write off more goodwill if asset quality declines. That has yet to happen, despite higher loan loss provisions — and in some cases, banks saw credit quality improve in the second quarter.

The calendar could influence this as well. Wilson says the budgeting process and cyclical cadence of accounting means that annual tests often occur near year-end — though, if a triggering event happens before then, a company can conduct an interim test.

That’s why more banks could record impairment charges if bank stocks don’t rally before the end of the year, Wilson says. In this way, goodwill accumulation and impairment mirror the broader economy.

“Whenever the cycle turns, banks are inevitably in the middle of it,” he says. “There’s no way, if you’re a bank to escape the economic or the business cycle.”

Banks Are Sunny In the Southwest

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Shareholders at banks headquartered in the Southwestern United States have good cause to be happy. According to data provided by Seattle-based investment firm McAdams Wright Ragen, which has a research focus on community banks, the price to tangible book value (PTBV) for Southwestern banks averaged 128.83 percent—a full 22 percentage points higher than the next best performing region—the Northeast, as of the first quarter.

Data courtesy of McAdams Wright Ragen’s Q1 2013 Community Bank Report. The report includes quarterly averages by region based on data from more than 1,100 publicly traded banks.

The region also boasts the lowest Texas ratio, at 13.83 percent, and non-performing assets to total assets of just 1.57 percent.

One-third of these banks are based in Texas, which serves as home to many highly valued community banks and boasts the highest PTBV in the nation, at 169.59 percent. Why are banks rated so highly in the Lone Star State?

According to John Heasley, executive vice president and general counsel at the Texas Bankers Association, the state of the Texas economy is key to the success of its banks. In addition to a boom in energy production, Texas benefits from the relocation of businesses from other parts of the U.S. that aim to take advantage of low taxes and regulations. That economic growth translates into increased loan growth and profitability. “Our typical community bank in most areas of the state [is] doing very well,” Heasley says.

Prosperity Bancshares Inc., based in Houston, and First Financial Bankshares Inc., based in Abilene, are two of the highest valued banks in the U.S., with both hovering around 350 percent PTBV. “Both are very focused on business lending,” says Heasley, leading both institutions to greater profitability. Prosperity has also been actively growing through acquisition. The holding company has made six acquisitions in the last year and a half, and recently announced plans to purchase FVNB Corp. and its subsidiary, First Victoria National Bank.

In contrast, the Southeastern United States continues to perform poorly compared to the rest of the country. While price per tangible book value on average is the lowest at 92.66 percent, book value has grown by 24 percent over the past year. So while pricing remains low, the Southeast seems to be working its way back up.