The following was excerpted from remarks made earlier this year at the corporate banking forum of the American Bankers Association.

Bankers are often seen as incapable of telling a good loan from the next writeoff.

In most market cycles, corporate banking is likely to be viewed as less desirable than mass-market consumer banking. The risks are greater, the vulnerability to economic cycles higher, and the returns more volatile. That's not a combination designed to win over a perpetually skeptical marketplace.

Yet this backseat business has recently begun to win investor converts and attract a more welcome brand of attention. There are many reasons, but let me cite two related factors.

* Consolidation has put a big dent in the industry's overcapacity, which has long been our single biggest barrier to running a competitive, profitable business.

* Prices, which have never accurately reflected risk, have climbed to more realistic levels.

Creditable Performance

After a disastrous decade. We seem finally to be doing something right. The industry as a whole turned in a record earnings performance last year. Stock prices boomed, and cynics have stopped comparing us to the S&Ls.

But don't misunderstand me. There are plenty of problems we have yet to face.

Asset quality certainly leads the list, if only because it's so visible, so dramatic, and, lamentably, so familiar to regulators and rating agencies. But it's far from the only predator lurking in the woods.

Strategy, expense management, and marketing savvy may not sound as impressive or even as important, but ultimately they will probably contribute more to our long-term health than the condition of our loan portfolios.

Fighting the Good Fight

Since asset quality will continue to be an important standard by which we are judged, we have no choice but to continue fighting the good fight. Even so, let's not lose sight that what we do for a living involves the evaluation and underwriting of risk.

Inevitably, some of that risk will go bad, but we cannot afford to accept the view that we have automatically done wrong if there is a troubled loan, a loss, or a restructuring.

The real problem is not that we accepted risk in the first place, but that we did such a miserable job of pricing it.

I won't drone on about the fundamentals of credit analysis, internal monitoring systems, and the need to act when assets begin to deteriorate. However, there are things we can address that are more universal - and strategy is one of them.

Know Your Customer

How well you know your customers, their industries, and their specific requirements has a direct bearing on how those assets, and your profits, will respond.

While it's obvious that you should know more about your customers, that's very, difficult when your customer base is virtually unlimited by type or size. Achieving real customer focus has not traditionally been well practiced in banking because we have often been geographically driven.

It's also easy to. forget the millstone of operating expenses. The problem isn't that credit costs occur - after all, they're a normal part of doing business. It's just that there often isn't a sufficient margin between revenues and expenses to absorb these periodic spikes.

Market Discipline Lacking

Last year, noninterest expense in banking reached $131 billion, five times the amount of charge-offs. That's a staggering sum, and it's symptomatic of a larger overhanging problem: Banking evolved in a closed system, without the rigors of true market discipline. As a result, there wasn't the brutal incentive to improve efficiency.

Look at measures of productivity improvement. In manufacturing, productivity grew by 2.7% in 1992, the single biggest increase in 20 years, and approached 5% in last year's fourth quarter.

In stark contrast, productivity improvements in the total services sector increased by a minuscule 0.1% a year for the last decade.

That's not to say we haven't made progress in the last few years - but even after 700 mergers and all the efforts to Prune the corporate business back to profitability, we're still overburdened with surplus capacity and excessive costs. And that bite into profits will continue to widen the impact of credit costs.

Comparisons Unfavorable

There's no question that if you judge banking by the standards of our best-performing customers, we come up short in terms of strategic differentiation, customer focus, productivity, and marketing savvy. As a result, we ate unable to operate at the peak of competitive advantage, quality of service, or efficiency of delivery.

If that's the case, then it's time to learn more from our customers. Without a doubt, the most important lesson concerns the connection between strategy and comparative advantage.

Over the past decade,- successful consumer and industrial marketers figured out that by knowing what they do best and then investing their resources accordingly, they're able to deliver quality products to meet real customer needs and do so in a cost-efficient manner.

Some banks have matched best industrial practices, but we all know that many banks haven't.

Knowing Your Strengths

From personal experience, I can assure you it's nearly impossible to make smart resource allocations without first knowing where you have a real comparative advantage. So it follows you cannot optimize efficiency without a clear strategic focus.

This isn't a new idea, of course. Some banks, like Banc One. have essentially abandoned corporate banking. Others, like Bankers Trust and Continental, have made it their single focus.

But specialization can be a lot more subtle than these sweeping strategic choices. For example, some have carved out profitable markets by targeting specialized industries: Chemical Bank with transportation companies, the Bank of New York in communications, Mellon with cable TV, BankAmerica with Hollywood, and so on.

One of Continental's targets is the insurance industry: We've found that our specialized insight into their requirements is a competitive advantage in that we can respond faster and more knowledgeably than many others.

Don't Bet the Farm

Don't get me wrong. I'm not advocating that like all bet the farm on one or two industries and hope for the best. But an informed industry focus can be a profitable strategy from both the revenue and expense perspectives.

Industry specialization is only one way to find comparative advantage. Others have targeted sales size or specific products.

The bottom line is that there are huge cost efficiencies to be had by knowing who your customers are and matching your product mix and capacity to those needs. You're spared having to waste resources trying to deliver a full menu of products to customers who may be outside your effective market.

Of course, this is easier to ommend than to do. We have to admit that banks by and large evolved without the perceived need for this kind of focus. Indeed, some argue that it is imprudent not to be widely diversified.

Getting the Facts

But ask your best customers. and they'll he able to give you precise data about principal competitors, profit margins, market penetration, and cost structures. We often can't mainly because we've had to deal with these questions in more than an approximate way.

Marketing success doesn't come cheap. I've been at this a long time, and I think one of our greatest management weaknesses is a lack of appreciation of how great marketing costs are.

We all know exactly what it costs to process a wire transfer or a stock transfer, but are pretty vague about the costs of identifying target markets, building marketing programs, and implementing then successfully.

For example, an average customer call costs about $2,000, and it takes 18 to 24 months to convert a cold prospect into a customer. Given the costs and time involved, you'd better have a good idea of whom you are targeting!

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