One of the most tangible outcomes of the Trump victory in November, and his first two weeks in office, is the energy and sheer giddiness that has returned to the world of banking. Lest we forget, these are the bankers that cut their teeth cleaning up bad commercial real estate deals in the early ’90s, dot.com bubbles in the 2000s, and the housing mess nearly 10 years ago. They have grown balding and gray through stress-tests, the Durbin Amendment, TRID, and a little shop on G Street in Washington called the CFPB. Yet, at Bank Director’s Acquire or Be Acquired conference last week in Scottsdale, Arizona, they resembled a college football squad that had just taken down a rival in the BCS championship. They walked the halls and rubbed elbows with a sense of relief, accomplishment and optimism.
Clearly, the bounce in each banker’s step is being caused primarily by the jump in their share prices. Bank stocks are up roughly 30% since Election Day.
With interest rates likely to rise (margin expansion), tax cuts on the way (economic expansion), infrastructure spending (financing opportunities) and less regulation (lower operating costs), bankers see a playing field emerging that was custom-built for their entrepreneurial animal spirits.
At the Acquire or Be Acquired gathering, US Bank CEO Richard Davis seemed to play the role of wise sage. Like Knute Rockne trying to calm a football team at halftime, Davis fired up his fellow bankers quipping that it was time to “play offense after eight years of playing defense.” At the same time, Davis slapped the helmets of bankers and asked them to take a breath and calm down. The fundamentals of saving, borrowing and spending don’t look that great when compared to bank stock prices. Many banks are also lagging in technology and can’t stay in this position forever, he warned.
So, esteemed GonzoBankers, while happy days may be here again, this is NOT the time to get cocky. This is the time to use the daylight to go after the tough strategic re-gutting that banks have to undertake. Here are five realities all bankers who want to build a more valuable franchise must face:
Reality #1: Today’s Valuations Mean Big Pressure Tomorrow
It’s great to see bankers beaming from rising stock prices, but the fact is nothing has drastically changed with bank earnings fundamentals in the past six months. The recent rally clearly drives a question squarely into every bank board room across America: is our going-concern value worth more than the takeout price we could grab in today’s frothiness? With banks now regularly fetching 2.5 or more times tangible book, management teams will need to build confidence in top-line revenue growth, sustainable operating efficiencies, and continued control of credit costs to remain independent. This pressure might lead to a focus on managing Wall Street optics rather than managing transformation of the bank’s business model. The real leaders will see that these multiples demand aggressive changes to how they do business now.
Reality #2: The Real Branch Day of Reckoning is Approaching
Many of the CEOs we talked with at the AOBA conference were hard-charging commercial lenders that primarily view retail banking as a passive source of funding for their commercial deals. Many are undervaluing and underinvesting in their retail franchises. These bankers are seeking comfort by using the term “branch light” as their future distribution strategy. Most have pared down branches 10% over the past three years and felt these moves were adequate to keep costs in line. This line of thinking is about to expire like a Blockbuster membership card. Over the next five years, online account opening for deposit and checking accounts will be mainstream, and there will be a period when retail sales in the branch sinks fast and too many bankers will be caught flat-footed. Companies focused on secure authentication, mobile apps and money movement will rear their heads in the form of new funding competition. The scramble to address this great reckoning will look reactive as too many bankers unload less valuable retailing space at the same time.
Reality #3: Digital Readiness Sucks … Period
Bankers intuitively sense that funding is about to become much more difficult than it has been for the past eight years. However, these same bankers operate with digital customer acquisition and cross-sell capabilities that look more like a government bureaucracy than an agile innovator. Chief financial officers who want to throw an anchor in the water and bring up deposit rates slowly as rates rise may hit an iceberg in the form of digital focused banks offering simple account opening and money transfer power. Nielson reports that the average consumer has 27 apps on his iPhone today. It won’t be hard to download app 28 for a killer money market or checking rate and a five-minute opening and funding experience. If this practice mainstreams to penny-pinching seniors, most banks will face serious challenges. Competing in the years ahead will require a digital investment that hasn’t been forked out yet. Cornerstone’s recent analysis of bank channels shows that roughly 80% of expenses continue to be centered in branches while digital, contact center and self service areas continue to starve at the budget trough.
Reality #4: Technology Execution Cannot Be Outsourced to the Cloud
It was a bit awkward watching 1,000 bankers, investment bankers and lawyers talk about technology at last week’s conference. While aping to use words they have heard like “cloud” and “API” and telling digital anecdotes about their children, it became clear that bankers are struggling to inject more technology mojo into their organizations. While there was plenty of bashing of the major I.T. vendors in breakout sessions, there were no gritty discussions of how banks, technology providers and FinTechs can work together productively to drive future value. Bankers wrongly think they can delegate this responsibility to someone else and not get their fingernails dirty trying to respond to technology changes. CEOs and boards will soon begin to recognize this challenge: we may not have the management depth and succession to truly drive the technical aspects of our business going forward. We may need to shake things up or exit now.
Reality #5: Value Will Flow to Those Who Get Better as They Get Bigger
Consolidation is gearing up rapidly for bankers, especially in the mid-size segment, where new regional players are being birthed by rapid-fire serial acquisitions and jaw-dropping mergers of equals. Many bankers in $2 billion organizations are waking up a few years later in organizations ten times their original sizes. While this helps bankers with the chest pounding of whose assets are bigger, it also creates new integration and indigestion challenges. Most importantly, it may serve to get bankers too focused on rolling up the legacy model instead of creating the new model. Who can forget how Hewlett Packard rolled up the operations of Compaq, Digital, 3COM, Palm and EDS only to create a stock that today is worth exactly same amount as when it started this journey 16 years ago? All the while, new technology players created and shifted the value on the competitive landscape. Every banker feels like a creator of shareholder value this morning. Yet, the real creators of value in the next five years will take the major shifts in this business seriously. They will use these brief good times as cover to execute on the more wrenching fundamental changes that need to occur to create highly-focused, knowledge and technology intensive modern banking players.
The team at Bank Director has done a heck of a job creating a discussion-filled annual ritual with the AOBA conference in the Arizona desert each January. Hats off to Al Dominick and team for sparking energy around M&A marketplace and providing a platform to talk about how shareholder value will be created in the years ahead.
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