You know you're in a slowdown when all anyone talks about is revenues.
During boom times, when profit margins run fatter and inefficiencies can be papered over, revenue growth is a given and its absence a dire warning.
Once a boom loses steam, investment analysts immediately turn their attention to top-line growth, knowing full well that companies have many more tools to help smooth out earnings than are at their disposal on the revenue side.
Little surprise then that this year's crop of restructurings, mergers, acquisitions, and even staff reductions have all been delivered with the promise that they would not just spur profit growth, but actually help companies bring customers in the door - or, increasingly, the portal - and translate into sales growth.
Is anyone convinced? Thus far, Wall Street seems to be emphasizing the "wait" part of "wait-and-see" a bit more than usual. For example, asked about the restructuring plan KeyCorp unveiled Thursday, which will cut nearly 10% of its workforce, UBS Warburg analyst Michael Plodwick expressed skepticism. "It's tough to keep momentum going when you're letting 2,300 people go out the door."
Banks are under tremendous pressure to show they have ideas that will translate into growth opportunities, even if a slowdown is under way. Chase Manhattan Corp. and J.P. Morgan & Co. went to great lengths in arguing their pairing was "all about growth" and had very little to do with eliminating overlap.
Still, there are some variations on the theme.
Top management of Memphis-based National Commerce Bancorp offered up the revenue refrain during a recent discussion of their just-completed merger with CCB Financial, formerly based in Durham, N.C.
Given the disparate businesses and geography of the predecessor companies, there were few opportunities to squeeze out overlap, and executives wasted little time trying to sell the deal as a major cost saver. For this reason, chief executive office Ernest C. Roessler understands the tepid reception the deal has gotten from investors.
"We understand that expenses are 'hard' and revenues are 'soft,' " he said, "but this was a clear case where we saw an opportunity to sell a lot of their fee-based products through our team."
What brought National Commerce and CCB together (besides an enterprising investment banker from Credit Suisse CS First Boston) was an opportunity the companies saw to take some nontraditional bank business lines - National Commerce's 401(k) processing program, is one example - and offer them to customers of the other. Along those lines, a smaller deal, in which NCBC picked up First Mercantile, a privately held trust company that offers defined contribution services, complements the package.
Robinson-Humphrey analyst Christopher W. Marinac is a believer, last week calling National Commerce "among the best EPS-growth stories in banking with high visibility." He said nonbank earnings, growing at a 25% rate, should be a greater proportion of earnings per share in the future.
The strategy, by the way, is hardly new. Bankers, analysts, and regulators alike know all too well that classic business lines are getting tougher and tougher to draw profits from.
"In the aggregate, the traditional business of banking is increasingly a tough way to make a buck," said Michael L. Brosnan, deputy comptroller for risk evaluation at the Office of the Comptroller of the Currency.
"Margins are hard to come by, you can't push expenses down, and allowances are probably going to go up. For institutions that do grow, it is more likely to be in the area of noninterest income," he said.
For large institutions, "it is almost certain that the core business of banking is going to be increasingly commoditized and less profitable," Mr. Brosnan said. "As I observe the industry now, there are three obvious areas, if you have the skill set and the willingness to set up an infrastructure and do it right, that will provide opportunities for revenue growth. They are capital markets, asset management, and transaction and information processing."
One thing few banks will ever be able to do is strip economic cyclicality out of their business models.
There, National Commerce has a couple of hedges in place, which may be why chairman Thomas M. Garrott seemed to almost welcome a slowdown.
An extremely low level of problem loans - net chargeoffs are running at about 0.08% of average loans - is one reason a downturn would make his day. "The market doesn't really reward you for high credit quality" until credit quality overall becomes a cause for concern, Mr. Garrott said.
Times when competitors are saddled with balance-sheet problems have historically been times National Commerce has picked up business, he said. If things get really harsh, National Commerce also has a unit that handles processing for bankruptcy cases.
Bring on the slowdown.