Climbing Out of Banking’s Dark Ages

Exactly two years ago, I offered survival advice to Gonzo readers as we entered the “Dark Ages of Banking.” In June 2008, the tea leaves were becoming clear when I wrote, “We are in for both a horrible remainder of 2008 [the market crashed four months later] and an even worse 2009… not all of this pain will go away by 2010.”

It’s been a heck of a nightmare, and I have been saddened to hear several top-level bankers say over the past year, “This business just isn’t fun anymore.”

Halfway through 2010, there is still nothing to be giddy about. We are knee deep in $400 billion of nonperforming loans (5.46% of all bank loans nationwide), and regulatory micromanagement has arrived for at least the next decade. Long-term unemployment is a real economic issue, and small businesses are hurting big time even if large corporate earnings have returned.

However, the hardest challenge for CEOs right now is a human challenge. With business pressures still sky high, the hardest job for bank leaders is to shake some new energy, creativity and craziness into their tired ranks. After a few years of bunker mentality, the bunker is becoming smelly, tense and ineffective. It’s time for CEOs and executives to shift their energies from surviving the Dark Ages to climbing out of this mess and giving their teams a sense of forward motion and progress. As coach Vince Lombardi once famously concluded, “Fatigue makes cowards of us all.”

In order to reverse this fatigue and climb out of the Dark Ages, bank leaders will need to do more than just execute on the basics. Sure, we’ve all tightened credit standards, built up the capital, trimmed expenses and worked “constructively” with our regulatory partners. But the real leaders that will emerge in our industry’s next era will think more like cash-strapped entrepreneurs in a startup company. On nights and weekends, the very best CEOs will be obsessing about how the “playbook” is changing in their industry and how they will compel their hundreds or thousands of employees to flush out this new playbook. For those who will be true leaders in 5 – 10 years, trying to develop a future strategy for the organization should feel damn uncomfortable. Anyone who’s got answers right now is probably just buying time until retirement.

So, as GonzoBankers work to shake off the fatigue and climb out of the Dark Ages, I would like to share five key mandates for bank leaders:

Mandate #1: Don’t whine about risk management and compliance, reinvent it.

One of the biggest threats to our organizations at present is the defeatism some are experiencing at the notion that we will be regulated out of business. Sure, the amount of regulatory compliance is beyond reasonable the past two years, but this should simply be viewed as a “tax” on our business that must be managed. It’s time for leaders to challenge their teams to get creative about managing risk and regulation more efficiently and effectively. CEOs should be looking to track their overall spend on risk and regulatory compliance and be asking for strategies that use data warehouse, dashboard, workflow and imaging technology to make compliance more efficient. At the same time, leaders should be making sure the REAL risk management (not compliance) is better developed in their organizations, using new pricing tools, analytics and modeling to be smarter at risk/return decision-making.

Mandate #2: Don’t focus on employee austerity, focus on comp alignment and talent grabs.

Think about it. To be a successful competitor in the future we need fired up teams of bankers hitting the streets, executing and stealing market share. Now think about how likely this will occur if we maintain 401k cuts, salary freezes and no bonuses. Leading CEOs (read Jamie Dimon’s recent shareholder letter) are spending a lot of time making sure their compensation strategies can really support the profitable growth of their institutions. In addition, opportunity-seeking CEOs are using this as a perfect time to steal great talent from disenfranchised banks. Just look at the full-page recruiting ads that BankUnited CEO John Kanas is running in American Banker to see how one GonzoBanker is cleaning up in the talent market right now.

Mandate #3: Don’t wait for fads. Steal retail banking market share now.

As banks frantically work to maximize their “opt-in” ratio for checking overdraft privilege, many are hoping that some bolt of lightning idea will come along to easily replace these billions of dollars in lost revenue. My advice is to quit dreaming and focus on the elephant of an opportunity that is sitting in front of most banks – market share steals. For the majority of mid-size and community banks, the focus in retail banking should be aggressive, service and sales based “hustle” geared at sticking it to the 10 largest banks in the country. Our industry’s history is filled with focused, mid-size institutions (North Fork, Commerce, Westamerica) that gained market share at the expense of the big guys. The same opportunity exists today.

Mandate #4: Don’t count paperclips, face reality on what drives operating costs.

The banking industry’s efficiency ratio stands at 54% today – not a bad number, but this has been primarily driven by a 50bp jump in net interest margin over the past year. Non-interest expense as a percent of assets stands at 2.88%. It is likely that banks will be forced to shave another 25bp of overall expenses on average to stay strong performers in the next decade. Banks that are serious about fundamentally changing their costs structures have two first places to start looking: branches and senior managers. It is amazing how few branches have been closed to date since the financial crisis began. There are still a lot of dogs out there that need to be consolidated and put out of their misery. Additionally, banks tended to become top-heavy with expensive executives – senior, regional and mid-level managers. Ask your HR manager to give you a list of the top 10% of your employees in terms of individual compensation and read down the list. Ask yourself, am I getting real performance, creative value and leadership from these individuals, or am I overpaying for average to sub-par performance and a big title. Dealing one by one with expensive managers is how you materially affect a bank’s cost structure.

Mandate #5: Don’t be a boring banker. Demand R&D on a shoestring.

With the extreme focus on asset quality, capital restoration and regulatory compliance in our huge industry, there is an enormous risk that our relevance fades because we get trumped by more creative entrepreneurs who are changing financial services. Any CEO looking across the landscape will see that payments innovations are everywhere, the Web and mobile are sure to change delivery, and new models and brands are building to deliver financial content and advice. Many of these companies are smaller upstarts that have nowhere near the resources we have. Banks risk being seen as the 8-track tapes of financial services if we don’t force our leadership teams to stay on top of these trends. So don’t let time and resources serve as excuses for a shortage of innovation in your organization. Make sure you have appointed someone in your company to be researching, digging and strategizing on all things payments. Make sure you have a clear Delivery Roadmap that states what Web and mobile investments are going to be made and how they will help drive the business. Make sure your executives are coming to you with business plans, marketing ideas and recruitment requests to build new niches that will help differentiate you in the market. There is a temptation for CEOs to adopt a “hunker down” mentality and see any dreaming about innovation and new business niches as impractical. That could be a fatal mistake for most leaders.

It’s been tough work hanging out in the bunker, but an unbearable stench is starting to infiltrate the place. Bank leaders need like never before to overcome fatigue and defeatism in their organizations. Building the will to win back into the team is job number one.
-spw

OK, let’s get busy!

1. Develop Plan
2. Implement Plan
3. Manage Plan

Sounds simple, doesn’t it? Sure, if it weren’t for all the variables and unpredictable events.

Wherever you are in the strategic planning cycle, Cornerstone Advisors can add value. If you need to craft a new strategic plan – we can help with that. If you could use some guidance on implementing your plan to achieve maximum efficiency, we can help with that. If you’d like to measure the effectiveness and relevance of your existing plan – we can help with that.

For more than a decade, Cornerstone has assisted financial institutions develop, implement and manage their planning efforts. If now seems like a good time to take another look at your institution’s strategic plan, let us know. We will be happy to share stories of our past successes.