What sets industry's top performers apart
Year after year there is remarkable consistency among the banks at the top of American Banker’s annual profitability rankings for small and midtier banks.
What accounts for their consistent high performance regardless of external factors like interest rates? It cannot be attributed solely to good market demographics or strategy. They compete in a variety of markets and pursue different strategies.
Rather, in our view, these institutions have certain fundamental characteristics in common: an understanding within the organization about where it can win; an emphasis on generating positive operating leverage (i.e., there is alignment between expense growth and revenue growth at the business unit level); the allocation of investment dollars to higher-margin businesses and growth markets; and a corporate culture that encourages action, accountability and performance.
Obviously, each of these characteristics is predicated on having competency in many areas, including marketing, human resources and sales management. One of the most important skills for gaining such competency is quantitative analysis — it facilitates the informed decision-making that underpins all of the characteristics cited above.
As is the case with most banks, top performers possess varying levels of competency across functions. However, they typically have very effective financial management and decision support. Broadly defined, this discipline encompasses financial reporting, financial and strategic planning, risk management, and analysis of sales reporting, performance and profitability.
See the 2019 rankings:
- How to be special: Our 2019 ranking of midtier banks
- Big gains, but warning signs: The top 200 publicly traded community banks
Well-functioning decision support provides reliable, timely and accurate information, enhances control and enables an institution to deploy resources more effectively.
Following are several traits of effective decision support found at top performers:
Rigorous budgeting, forecasting and planning processes. Gather meaningful input from line managers for budgeting and planning through well-defined procedures. Use templates that isolate the financial impact expected from new initiatives.
Ideally, institutions should employ long-term forecasting to enable the executive team to gauge the momentum of the core business. Forecasting also helps quantify the financial impact from anticipated changes in the macro environment.
To reinforce accountability, establish a formal, recurring process for executives to review and discuss variances, to make changes in financial forecasts, to monitor the performance of the bank and to identify steps to prevent unfavorable variances.
Timely and relevant business intelligence and performance analytics. Deliver financial reporting and analysis in a targeted way throughout the organization, such as by line of business or geography. Incorporate performance metrics, peer data and trend analysis into financial reports.
Succinct and timely feedback helps line managers and executives evaluate performance, whether from new lines of business, new strategies or sales and marketing initiatives. For instance, lead generation and customer conversion rates from digital channels are increasingly relevant, given the increased focus on digital marketing at many banks.
Financial and risk analyses for major projects. Make a business case for capital investments, marketing initiatives and major spending programs. To establish accountability, reflect the business case in budgets very clearly.
Conduct follow-up analysis to determine if the anticipated return was realized. For instance, did an investment in video teller equipment yield salary savings as projected?
Focus on profitability when evaluating new products and lines of business. One bank abandoned a proposed partnership with a digital third-party consumer lender because the financial and risk analysis showed that the net profits, after accounting for the revenue split with the partner, did not justify the potential credit risk.
Macroeconomic conditions certainly influence performance. However, institutions with important decision-support traits like those listed here can become top performers regardless of the operating environment.