Thanks to rising interest rates, lower corporate taxes and easing of regulations, the prospects for higher bank profits are bright. The positive trends provide management teams with options regarding where and how to invest in their business, according to Capital Performance Group’s analysis of the banking industry’s 2017 financial performance. The dramatic changes in consumer and business behavior, and the rapid adoption of technology, also present a wide range of ideas about what investments banks will need to make in order to remain competitive.
More options, however, don’t always translate to better decisions for the long-term success of a bank. There are many research studies that suggest the greater the number of choices, the harder it is to make the right choice. We believe this plays out in the banking industry, where many banks often enter new lines of business and new geographies when investment dollars are available.
But banks don’t necessarily have a good track record with the concept of “more is better.” More branches in more markets have contributed to inefficiencies at many institutions. More product offerings have resulted in too many choices for consumers, watered-down value propositions, ineffective sales conversations and operational complexity in the back office. For some banks, more lines of business have distracted management teams while contributing little to the bottom line.
Our research on the top-performing banks provides examples of management teams that demonstrated an ability to manage the noise and focus on the most important drivers of success for their institutions:
• Some of the standouts purposefully shrank or completely exited lines of business to focus on core activities. Residential mortgage lending was a common pain point this year. Bank of the Ozarks exited its secondary market home lending business, and U.S. Bank exited its wholesale mortgage lending facility.
• Serving particular customer segments continued to work well for others. Silicon Valley Bank (innovation focus), Bremer Financial (agriculture and nonprofit focus), Signature Bank (middle-market business focus) and East West Bank (Chinese-American focus) all offer value propositions that make them perennial high performers.
• Driving efficiency helped propel others to success. Continued trimming of the branch network was a profitable strategy for FCB Financial Holdings and Western Alliance and, notably, they still maintain healthy core deposit growth. Both have reduced their branch networks by more than 10% since 2015, contributing to steady improvements in their efficiency ratios. Many top performers continued to post sub-40% efficiency ratios by intensely monitoring noninterest expense levels against peers and ensuring that new investments generate positive operating leverage.
See the 2018 rankings:
- The branch-closing conundrum: Our 2018 ranking of midtier banks
- Cautiously optimistic: The top 200 publicly traded community banks
Ultimately focus remains the most important strategic imperative for high-performing banks. So, what management characteristics lead to clarity in strategic focus?
• They know what they want. They set clear financial and strategic targets to be achieved. In turn, these targets provide the framework for prioritizing the initiatives to be pursued and the others that should be postponed or dismissed completely.
• They are data-savvy. They use data accurately and objectively to identify the handful of opportunities that will help the bank attain strategic targets. They then use data again to determine the best options for pursuing those opportunities.
• They understand what they do well. The high performers recognize what strengths they can leverage and build on. They know which segments they serve well. In short, they see where they can win.
• They communicate better. A sharp strategic focus and a well-conceived plan are important. However, both must be clearly and consistently communicated throughout the organization to ensure unity of direction. It’s no accident that the best leaders are also the best communicators.
• They act fast. None of the above matters if the institution takes too long to implement and execute. In today’s world, the timeline for action is becoming shorter and shorter.