Competitionfor low-risk loans is fierce, putting downward pressure on pricing. Everyone inthe banking industry knows it. But simply cutting prices is not the only way — and often not the best route — to generateasset growth.
Banksinstead should think about winning business by providing customers multiple optionsand creative credit products. Many borrowers will live with a higher rate if theyknow they are getting innovative ideas and higher levels of service. Or, on theflipside, if a bank does move down on pricing, in exchange it can often get morefrom a customer than a loan deal. The bank may price a loan favorably but in doingso convince a client to park more deposits with it or start doing additional businesswith the bank that helps generate fee income. It could become a cross-selling story.
Thesewere themes to emerge early at the 5th Annual SNL Financial Community Bankers Conferencethis week in Dallas.
"Yourborrowers want choices, so give them what they want," Greg Upham, co-founderand chief delivery officer at PrecisionLender, said at the conference.
He laidout an example as a case in point. A customer wanted a $1.5 million fixed-rate loanat 4.3% with a maturity period of 60 months. Key for the customer was keeping themonthly principal-and-interest payment at $9,377 or below.
The lender,however, had a target ROE of 19% on its loans. The customer's request would havegenerated an ROE of 18.28%. If the lender had reviewed this customer simply on itsrequest, it may have had to take a pass and lose the business. But, instead, itcrafted three creative solutions that could keep the customer's monthly paymentat or below its target and provide the lender the return it needed, Upham said.
One optioninvolved simply shortening the maturity period by four months. That got the customerits desired rate but still provided the lender an ROE of 19.06%. A second idea calledfor keeping the maturity period at 60 months but using a floating rate — one-month Libor plus 2.85%. At thetime, this significantly lowered the customer's initial rate and payment below itstarget in exchange for assuming interest rate risk down the road. For the lender,projected ROE came in at 19.33%. And a final option involved providing the customerthe rate and maturity period it wanted, but requiring it to put $75,000 in depositsinto the bank and using the lender's fee-based treasury management services. Thisput ROE on the deal at 19.38%.
"Thisis how we can use the power of choice" to strengthen relationships with customers,lay the foundation to win more of their business in the future, and bolster theprofitability of these customers, Upham said
"Don'tfall into the trap of just treating everyone the same," Upham said.
ErikWnuck, an S&P Global Market Intelligence director, agreed with that assessment,saying at the conference that banks must view their role as one of being "inpartnership" with clients. When banks provide a steady stream of ideas andnew approaches to solve ongoing challenges, he said, they bolster their ties tocustomers and create opportunities to maximize cross-selling efforts.
Still,Wnuck said, sometimes certain customers are interested only in the lowest pricethey can get on a loan. A bank may lose those customers. But, he said, "maybethat's not the worst thing in the world."
RichardBerg, CEO of Performance Trust Capital Partners, took that thinking a step further.He said that while banks ultimately want as many core customers as they can get— somewhere in the range of 95% of thebalance sheet — he said in reality that figure tends to be only about 50% to 60%for most.
So while banks of course should get creative in tryingto win profitable lending relationships, many should be quicker to let non-coreand less profitable customers leave. He said banks can often replace this businesswith securities and other investments. These, too, are non-core elements of thebalance sheet, Berg said, but they can be more profitable.
An example: He pointed to one community bank thathad $100 million in investments with a book yield of 1.52% and $900 million in loanswith a 4.31% yield. The bottom line: Total assets of $1 billion with a yield of4.03%. A second community bank had $325 million in investments and $675 millionin loans, giving it total assets of $1 billion as well. But its investments provideda yield of 2.91% and its loans 4.75%. By hunting for more investments and scalingback to its best loans, it generated a better overall yield of 4.15%, Berg said.
The thrust of his argument, he said, is that banks"want quality, sustainable earnings," and in an era of slow economic growthand low interest rates, more lenders need to get creative to do just that.
SNL is part of S&PGlobal Market Intelligence.