The FDIC’s First Quarter 2001 report on the banking industry reveals an alarming issue: revenue growth is simply anemic. During the quarter, revenue growth increased 4.3% over the same quarter in 2000. This compares poorly to the 7.6% growth rate between 2000 and 1999. Worst of all, the banking industry coupled its 4.3% revenue growth rate with a whopping 6.8% growth in non-interest expenses. As the freeway motorist warned John Candy in the movie Planes, Trains and Automobiles, “You’re going the wrong way!”
Oddly enough, banks earned record profits of $19.9 billion during the first quarter of 2001, but these profits were propped up a great deal by securities gains. The FDIC reports that the majority of banks (54%) earned ROAs in the first quarter that were lower than a year ago. Slowing revenue growth usually means earnings struggles are on the horizon. Certainly, the revenue pressures in the first quarter were due to the fact that the banking industry experienced its sixth straight decline in net interest margin and now stands at the lowest net interest margin levels in almost 15 years.
As the American Banker recently concluded, “Banks are under tremendous pressure to show they have ideas that will translate into growth opportunities, even if a slowdown is under way.”
In the years ahead, revenue growth simply won’t be as easy as it was in the ‘90s. The truth is, banks achieved revenue growth over the past decade by hustling without much of a strategy. Going forward, I see three major levers that bank management can pull for revenue growth:
Revenue is still out there for the bank that has the guts and the patience to understand one thin slice of financial services better than any other competitor. Whether this is a niche in lending to car washes, securitizing multi-family paper, or providing cash management services to casinos, specialization will win over the 10,000+ banks who want to compete by having a “more personal touch.” As Chris Zook, worldwide leader at Bain & Co., recently concluded: “Companies have to return to their core and ask the hard questions about their distinct strengths like never before. It’s a time for focus and specialization.”
I guarantee that revenue growth will magically “appear” out of nowhere if the right incentive plans are put in place. With high pressures for revenue, banks will begin to let loose a bit with their incentive plans in the next few years. No more Marxist, 7% across-the-board type of deals, please. The incentive plans that drive bank revenue growth will have big winners (“Kent – you’re rich!”), big losers (“Myron, the door is that way.”) and armies of (thank God) self-centered, money-loving entrepreneurs.
Finally, revenue growth in 2001 and beyond will require volume-focused bankers to revive the lost art of asset and liability management. Remember ALCO? Does anyone recall that burgeoning discipline in the early ‘90s when vendors like Sendero, Treasury Services and QRM were selling sophisticated tools to price products, measure profitability and manage risk? What happened? A booming economy and a merger frenzy kicked in, and the only one who looked at the ALCO reports during the ‘90s was the lonely treasurer.
Flash forward to 2001 and Greenie’s six consecutive rate cuts. Suddenly things have changed. Revenue growth and volume growth are no longer synonymous. A bank’s balance sheet has become valuable real estate where lenders and retail bankers will both be pressured to eke out better margins. No more LIBOR-based pricing to the Happy Hooker Bait Shop down the street. No more 8% CD specials because “everyone’s doing it.” Revenue growth on the margin will be tedious, disciplined work that will take one whale of a partnership between the sales and financial folks. (Full disclosure: “partnership” between sales and finance may also mean red-faced arguments from time to time.)
Gonzo readers may notice that I did not list the holy grail of “cross-sell” as one of the key levers to drive revenue growth. That’s because despite all the hubbub, it will not be as significant as the three strategies mentioned above. Unfortunately, many financial institutions seem to have bought into the following strategic calculus:
Personally, I don’t buy the logic and I wouldn’t bet my bank on it. Let’s not promise the Street that cross-sell is our real hope for revenue growth. Instead, let’s get real about niches, let’s show bankers the incentive money and let’s crank up the old ALCO engine. Now stop reading this Gonzo e-mail trash and get back to work. We’ve got a bank to run and some revenue to find! -sw