Amerant Bank in Coral Gables, Florida, plans to outsource a substantial portion of its back-office operations to the core provider FIS in a move that’s expected to yield $12 million in annual savings.
While outsourcing by banks is not a new phenomenon, the deal between FIS and the $7.5 billion-asset Amerant appears to be unique in its scope. Amerant plans to transfer 90 positions to FIS, the bank said in a press release Thursday.
Amerant CEO Jerry Plush said that the deal will allow the bank to improve efficiencies significantly. The bank, which had an efficiency ratio of 74.2% on Sept. 30, has previously set a goal of pushing that metric below 60% by the end of 2022.
“We believe this partnership will enable us to achieve our operating efficiency targets more quickly and continue profitably growing our company,” Plush said in the press release.
Thursday’s announcement offers clearer guidance on how Amerant plans to reach what had been seen by some analysts as a very ambitious goal for reducing costs as a percentage of revenue.
Referring to Amerant’s efficiency ratio at the end of 2022, Stephen Scouten, managing director of equity research said Friday: “We were modeling them at 66% because we didn’t have any visibility about how they’d get there.”
The outsourcing agreement has the potential to slash Amerant’s efficiency ratio by 400 basis points, Scouten added.
Amerant reported noninterest expenses totaling $48.4 million for the quarter ending Sept. 30 and $143.2 million for the first nine months of 2021.
Plush, who was named CEO in January, has implemented a number of partnerships, including a deal with
Amerant did not provide a lot of detail about the roles that will be outsourced to FIS, but a bank spokesperson did say that the agreement covers information technology services as well as risk and security functions.
Scouten said he was unaware of any banks making a similar move.
“It’s pretty fascinating,” he said. “Is this going to be the new normal for some banks?”
While large cost savings represent one obvious benefit for a bank considering outsourcing its back-office operations, there are also potential drawbacks, Scouten said. Outsourcing, with the resulting staffing reductions, may run counter to the community banking philosophy. It also involves surrendering control over critical functions to a third party.
“There are a lot of bankers that won’t be comfortable with that,” Scouten said. “In my view the benefits should outweigh any drawbacks, especially to the investment community.”
Damian Burleigh, chief revenue and marketing officer at Acuity Knowledge Partners, said that he wasn’t surprised by Amerant’s announcement and expects to see a number of banks make similar moves. Acuity provides support to banks on underwriting and loan decisioning.
In recent years, a growing number of banks have turned to Acuity for those lending support services, freeing up lenders to focus on business development, Burleigh said. The unit at Acuity that provides those services has doubled in size over the past two years, adding 1,000 employees, Burleigh said.
Numerous factors, including heightened demand for credit and banks’ difficulties in hiring new talent, are expected to push more banks to consider outsourcing. “It lets them focus on the value components of the business — capital, the price of capital, relationships — not on the internal machinery,” Burleigh said.
Amerant shareholders appeared enthusiastic about Thursday’s announcement. The bank’s share price was up more than 6%, to $28.88, in afternoon trading.
