Commercial lenders now have their own serious problems to think about as the nation's credit crisis deepens: Along with slowing growth and weakening credit fundamentals, commercial divisions also are dealing with their battered parent companies' capital and funding constraints.
Underscoring this important line of business' changing fortunes, the Federal Deposit Insurance Corp. recently reported that commercial and industrial loan growth in the second quarter was down 80% from the year earlier.
Meanwhile, bankers are realizing that the commercial underwriting standards used in more favorable times have fallen badly out of date. Booked credit needs to be reevaluated in many cases, and standards for new loans are being tightened.
Already, waves of defensive cost-cutting have been set in motion around the industry. Yet for commercial banking teams, the situation introduces a much larger management question — how to reposition for the new competitive environment while avoiding self-defeating cutbacks.
Progressive institutions are using four practical initiatives to meet this crucial challenge: agree on core strategies and jettison everything else, use segment knowledge to tap hidden growth opportunities, improve analytically based marketing capabilities, and streamline support operations so that relationship bankers can spend more time prospecting and selling.
Strategic review: Toward the end of an economic expansion, bankers inevitably find that a certain portion of projects begun in good times are not sustainable. To sort through the uncertainty, one useful diagnostic tool is based on the risk-adjusted product margin.
First, each activity should be tested for direct profitability — revenues less direct operating expense, interest expense, and the probable costs of associated risk.
Second, each activity should be further evaluated by including associated delivery channel costs. And the final test includes a review of associated overhead expense.
At each stage, various markets and business activities can be ranked according to profitability, and bottom-rung activities should be thoroughly reviewed. Equipped with these results, commercial bankers will have a much clearer understanding of where to cut — and where to preserve and strengthen.
Growth segments: Many banks continue to classify their commercial customers in simple terms, such as geographic location, sales volume, and industry sector. But this omits valuable information on customer needs and purchase propensities.
Behavioral segmentation, which is based on detailed observations of how various groups of customers manage their working capital over time, is a better way.
Among established customers rich opportunities exist to analyze patterns in account behavior (type and scope of balances, transactions, and use of services) and relationship traits, and to apply that knowledge in prospecting and relationship expansion activities.
For example, current customers within high-performing behavioral segments can be analyzed to identify key attributes that can be used to find underserved "look-alikes" elsewhere within the customer base. With profiles similar to those of in-depth clients, these high-potential companies should become cross-sell priorities.
Marketing science: In most commercial divisions, marketing is narrowly viewed as a one-on-one endeavor between the relationship manager and the client. By contrast, progressive corporate banks are looking at the total marketing and sales outreach, with an eye toward systematic improvements that leverage customer and market intelligence. We define marketing science as the disciplines related to defining, building, managing, and measuring key revenue-producing capabilities. The immediate, pragmatic objectives of marketing science are threefold: First, help relationship managers become more productive by identifying and prioritizing prospects; second, identify cross-selling opportunities through propensity and wallet modeling; and third, identify and proactively address attrition risk through advanced modeling techniques.
Support services: Commercial banking officers often are handicapped by inadequate and/or unresponsive operational support.
First, relationship managers become distracted from customer sales and service priorities as they are forced to "put out fires" in problematic daily activities. Second, the priorities of the supporting functional groups can diverge from those of the business line, causing frustration, wasted energy, and client disappointment.
Several process changes can significantly improve how relationship managers spend their time. Three examples are standardized loan approval packages, centralized servicing (especially for transaction-intensive customers), and off-loading non-customer-oriented tasks, for example, administration and portfolio management.
A key management perspective that runs through these four performance-improvement initiatives is recognition of a middle path between the extreme of wrenching and expensive transformational initiatives and the extreme of locking down the current business model and putting it on a starvation diet.