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Remaking your bank in the “new normal” E-mail

11 steps your bank can take


March 9, 2011
By Joseph H. Cady, CMC, and Nichole Jordan

The Great Recession has brought a downturn to levels not seen in the lifetime of most bankers today. Led by over-leveraged consumers, unrealistic real estate values, and cautious businesses, the damage to the banking industry has been significant. Depressed earnings, weakened credit quality, reduced capital levels, limited loan growth, and the like have created conditions unprecedented in recent times.

Although it appears the industry is now emerging from the depths of the recession, storm clouds remain on the horizon. Future bubbles in need of further realignment include the housing market with significant numbers of homes still awaiting foreclosure, commercial real estate, state and local municipalities, high levels of federal government debt (including associated risks of inflation and impairing the credit standing of the U.S. in the global economy), persistent high unemployment, European debt crisis, and other pressures continue to put the strength of the recovery at risk. Many banks are left to ponder if and when, and to what degree should they shift from a defensive posture, to more of an offensive focus.

To be certain, the recession has inflicted change to the banking landscape. Some have speculated as to whether these changes are permanent, or at a minimum, long lasting. Have paradigm shifts in economic conditions, regulatory requirements, and customer needs created a “new normal” in the environment in which we will operate?

The environment in which banks will now operate will certainly be different from before. Most economists predict that it will be another five years or more before unemployment normalizes around 5%. With the forthcoming Dodd-Frank, Basel III, and other regulations, regulatory demands and requirements placed upon the banks may be at an all time high. It remains to be seen if the increased savings rate among consumers and businesses will continue once economic growth returns in earnest, although the high debt levels of consumers and some businesses, along with the aging and retirement of the Baby Boomers, suggest that the trend should persist.

So what we can expect over the foreseeable future is a suboptimal performing economy, accompanied with strong bank competition fighting over fewer quality credits. When combined with regulatory limits on lines-of-business concentrations and fee restrictions, revenues will be reduced, perhaps up to 30% lower (as estimated in some studies). Many institutions will need additional capital, especially if the economy fails to recover with any vigor. Nearly all banks will suffer higher costs of doing business, and distractions away from the business of banking, from the added compliance burden. And when one combines all of these factors, clearly most institutions will be less profitable than before.

All told, the sum of these changes to the banking landscape suggests that a “new normal” does exist, perhaps not permanently for all conditions, but for most changes at least on a protracted basis for some time to come. Not only must bankers overcome the fatigue associated with operating under these difficult conditions for an extended period, they must understand how their bank fits within this new environment.

Fitting in the new environment
We have heard from several CEOs who have cut costs, improved efficiency, and stemmed credit losses, and are now back to breakeven. But they find themselves operating in a climate where there is weak growth in loan demand, intense competition, added costs, and continuing credit risks. Unfortunately, with the slow economic recovery and time needed to work out the oversupply of banks, there appears little chance to grow their way out of this dilemma in the near term. They are left to wonder whether and when they are going to make consistent, satisfactory returns on a going-forward basis. Is it possible to prosper in the new normal?

While it will indeed be possible to succeed in the new environment, it will require more focus and attention to detail than ever before. First, banks will need to assess the impact of new regulations on their business models, and implement the appropriate processes and procedures to comply with the new regulations proactively. Second, banks must improve their governance and risk management oversight. Many banks are engaged in discussions over voluntary measures to improve risk management and bank governance. They are working to cooperate with regulators on this area and also trying to foresee which direction the new rules may take. Third, banks will need to address the distressed assets on their balance sheets in the most advantageous manner for the bank. Banks will either need to ensure the skill set exists within the bank to effectively manage the assets internally, outsource this function, or develop a strategy on how to monetize the distressed assets. And fourth, while there hasn’t been a significant amount of M&A deal activity as of now, banks are starting to look more seriously at what to do with what they have.

When times are good, banking is a relatively easy business in which to make money. The problem is that banking is no longer an easy business. Being an average or ordinary bank in the new normal may, in fact, be a death sentence.

Clearly, these are challenging times for the industry. Most banks are at a crossroads for their survival: You can either revert back to the traditional ways of banking, and settle for less profits and growth; or you can consider new thinking and perhaps transformational ways of adapting to these changing conditions. Certainly, there has never been a more important time to think strategically about positioning your bank, outmaneuvering competition, and distinguishing yourself in the eyes of your customers.

Strategies for success
So how can your bank succeed in the new normal? Obviously every institution is different, and not all strategies will be appropriate for each bank. But let’s take a look at some possible strategies for success and adapting to the new normal:

• Increase staying power – In order to succeed, you must survive. Capital will continue to be king. Maintain strong and conservative levels of capital. End any bleeding on the bottom line, if still an issue.

• Become a low cost provider – This will be a must for most, to develop a core competency in low cost delivery, in an effort to help offset higher costs. Shifts to technology based delivery, closing unprofitable branches, and eliminating non-core business units are some of the possible strategies here.

• Make shifts to your lines of business – Focus on your customers’ shifting financial needs (e.g., savings products, retirement services, reliability of your service offerings). Evaluate each LOB for its contribution to the bank’s growth, profits, and safety; divest those LOBs which contribute weakly to your priorities. Also review your geographies and other markets to ensure they continue to make sense. Consider non-lending LOBs such as investment services and cash management, along with fee income LOBs such as mortgages. Within targeted niches, increase the breadth of your products and services, to promote cross selling and relationships, ensure the competitiveness of your offerings against larger and more robust competitors, and to maintain margins against loss leader competitors. Renew emphasis on innovative and complementary LOBs, such as microlending.

• Revisit pricing structures – Look for opportunities to mitigate added costs by increasing revenue through increased fees, adjusting account minimums, and eliminating free products and services. Or consider a contrarian strategy to maintain free services and low fees, in an effort to distinguish your bank from others.

• Focus on niches and competencies
– Take business from others, by being better than
your competitors. Focus carefully on proactively positioning your bank to best succeed in the new normal, outmaneuvering less nimble competitors, and using the aforementioned steps to distinguish yourself.

• Manage business development talent
– Hiring your competitors’ BD officers with a book of business isn’t the only way. Consider other means to better utilize the talent you have. This includes restructuring tasks to others, and reallocating officers’ time, to refocus your BD producers on spending more time to bring in the business.
• Build scale? – It has been speculated that community banks will need scale in the future, to achieve a reasonable level of profitability in light of the increased burdens. We have heard of asset size threshold estimates of $250 million up to $1 billion needed to survive. We are very skeptical of this argument. Historically, community banks have been more profitable than larger banks, especially when one discounts fee income. Rather than a certain size needed, survivors and those who thrive will be more dependent on having effective niches, competencies, and the effective execution of those strategies.

• Better risk management – This includes more accurate and reliable definitions of risks, along with the management of those risks. The Dodd-Frank Act will require each publicly traded bank holding company with total consolidated assets of $10 billion or more to establish risk committees. At the same time, regulators have raised their expectations for risk management and improved governance at all banks. Banks should ensure board oversight of risk management is clearly defined and well documented. It is a best practice to establish a risk committee with a specific charter to strengthen board oversight. It is important to allow the Chief Risk Officer independent access to the board members. In addition, ensure that more attention is given to monitoring operational risks as the significant component of the overall risk profile for the bank. Focus on the operational processes and procedures that monitor the operational risks, as regulators will review this area more heavily in the new environment.

• Ramp up compliance capabilities – Focus on getting ahead of the pending flood of new regulatory requirements. This may encompass securing new talent with experience in regulatory compliance, and increasing your bank’s attention to detail in compliance related activities.

• Reduce expectations – In the new normal, many banks won’t be as profitable or grow as rapidly as before. This requires communication, patience, and a scale down in performance expectations among shareholders, directors, and management. Rather than quarterly performance, the focus should be on serving customers effectively. Being customer centric and building relationships, not catering to the unrealistic and outdated expectations of others, will serve most banks well going forward, and should result in maximizing performance as well.

• Weigh long-term options – Carefully and objectively determine the long term viability of your bank. Can you develop and maintain a defensible competitive position in the new normal, and achieve a level of performance satisfactory to your shareholders or owners? How much time, effort, and resources will be required to do so? Is this reasonable? After thorough deliberation, if your viability is not assured, consider maximizing the value of the bank in the eyes of a buyer. Once franchise value has been maximized, sell the bank when market valuations have returned to more reasonable levels. Unfortunately, strategies to maximize value are often quite different and in conflict from those steps to ensure viability, so you won’t be able to pursue both options simultaneously.

In sum, if you undertake the appropriate repositioning steps, have the right strategies, and can execute well, your bank can succeed in the new normal. For most, this will include having quality leadership and management, effective direction and strategic plans, strong core deposits, effective niches, deep and profitable client relationships, a good balance of risk versus return, and realistic expectations. Indeed, the future may be promising for those banks who remake themselves effectively in the new normal.

Joseph H. Cady, a Certified Management Consultant (CMC), is the managing partner of CS Consulting Group LLC, a San Diego-based strategy consultancy specializing in financial institutions. The author is a frequent speaker and contributor to banking publications, and his observations are based upon almost two decades of strategy formulation experience with managements and boards from financial institutions of all sizes. Contact him at (858) 530-8250, or at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

Nichole Jordan, is a partner and national sector leader of Grant Thornton LLP’s Banking and Securities Practice. Jordan has worked extensively with banks and other financial service firms. She works in Grant Thornton’s New York-downtown office and can be reached at (212) 624-5310, or at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
[This article was posted on March 9, 2011, on the website of ABA Banking Journal, www.ababj.com, and is copyright 2011 by the American Bankers Association.]
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