As the U.S. economic recovery picked up speed in the third quarter of 2021, the decline in commercial line utilization that had taken place throughout the pandemic started to bottom out. Even though commercial loans continue to decline on a year-over-year (y/y) basis, banks are reporting very strong growth in their commercial loan pipelines. In the expectation that economic growth will continue to recover and this will translate to growth in commercial loans, banks are already starting to position themselves to capture their share of this growth.
With this in mind, the following is a list of five commercial banking initiatives that banks pursued in the third quarter of 2021:
Revisiting commercial banking capabilities. In a commercial banking environment characterized by changing customer priorities, the advent of innovative financial technologies and the emergence of new competitors, many banks are revisiting their commercial banking value proposition. This is seen in the articulation of new commercial banking strategies in recent company filings and investor presentations as well as in recent commercial banking videos from banks like Truist and Citi.
Publishing industry-specific thought leadership. By focusing resources on industries that have strong growth potential and/or that are under-served, banks can improve ROI. One of the best ways to build engagement within these sectors is by publishing industry-specific content (e.g., articles, blogs, newsletters, reports, podcasts and webinars). Many banks also look to turn this content into a prospect generation tool by listing relevant executives (often with email and direct phone numbers) in these publications.
Developing a series of branded content, which both increases awareness of this content and facilitates promotion across multiple platforms. Examples of branded content series include:
Providing value-added treasury management and commercial payment tools. With businesses increasingly comfortable with applying new technology solutions to enhance business efficiency and productivity, banks have launched a number of treasury management and commercial payment tools, including:
Increasing focus on ESG. In addition to annual ESG and CSR reports, many banks are publishing ESG-related content for their commercial clients. Examples in 3Q21 included Bank of the West’s Means & Matters Stories of Money and Sustainability and the BMO Harris Sustainability Leaders podcast. Citizens went even further by launching Green Deposits for its corporate clients.
According to the FDIC’s Quarterly Banking Profile, U.S. commercial and industrial loans rose 4.8% y/y to $2,077 billion at the end of June 2018. This marks the third consecutive quarter of accelerating y/y growth since reaching a six-year low of 2% at the end of 3Q17. Evidence from leading banks’ quarterly financials and investor presentations is that this commercial loan growth is often driven by a focus on particular vertical industry sectors. For example, PNC reported commercial loan growth of 4.5% in the year to the end of 2Q18, driven by financial services (+9%) and retail/wholesale trade (+7%)
Vertical industry targeting provides a range of benefits for these banks:
Drives stronger growth in loans to that sector—in particular if that sector has been underserved—which can help push up overall commercial loan growth rates.
Provides a point of differentiation from competitors.
Enables a bank to leverage synergies between traditional or current bank strengths (such as expertise in certain product or service categories, or proximity to industry clusters) and the financial needs of targeted companies.
Creates an opportunity for a bank to expand beyond its traditional retail branch footprint into new geographic markets. Fifth Third recently launched a Financial Institutions Group in New York City.
We recently scanned the commercial banking sections of leading banks’ websites to identify targeted industry sectors, which we have summarized in the following table. Not surprisingly, most of the banks are targeting large sectors (e.g., healthcare, energy and government). However, a number of banks also appear to be targeting more niche sectors, such as aging services (SunTrust), the wine industry (Union Bank) and vacation ownership (Capital One).
We recognize that simply listing industries on their websites does not mean that these banks are fully engaged in targeting these sectors. But if your bank is looking to significant grow clients and assets in particular vertical industry sectors, the following are some key considerations:
First step: size the market opportunity (e.g., how many companies from that industry meet your revenue/other target-size criteria and are located within your traditional retail footprint and nationally). It also important to identify industry clusters.
Use primary and secondary research to identify company characteristics, financial needs and the decision-making process. A key source of primary research should be your front-line salespeople who may already be selling to these companies in your targeted sectors. You should then be able to asses the bank’s current ability—in terms of product suites, number and quality of dedicated personnel, as well as marketing and sales support assets—to effectively serve these segments.
Conduct competitive intelligence to study other financial providers targeting the same segments. Identify you key strengths and limitations relative to these competitors.
Create and deploy dedicated industry teams. If possible, locate your teams in markets where targeted companies are concentrated. Staff the teams with industry experts and support them with training, industry collateral and other sales support tools.
Build awareness and engagement through targeted marketing investment, with a focus on particular in industry-specific marketing media and events.
Further engagement with prospects through industry-specific thought leadership, using a mix of formats and media, such as articles (published in your own content portals or in vertical industry media), blog posts, social media channels, surveys, reports, and client success stories.
Second quarter 2013 financials for leading U.S. banks reveal continued strong growth in their commercial loan portfolios. The chart below shows that 11 of 16 banks studied reported double-digit growth rates, with an average increase of 11%. And most of the banks reported very strong commercial pipelines in the second quarter.
Some of this growth can be attributed to improved confidence among U.S. firms. In addition, banks are generating strong growth rates by targeting specific vertical industries that have high-growth potential and/or have been traditionally underserved by banks. These large U.S. banks can assign dedicated teams and create customized campaigns for different industries, which creates a competitive advantage over smaller banks who lack the necessary scale to justify this incremental sales and marketing investment.
However, increased competition in the commercial lending market (particularly in the general middle market sector) is contributing to declines in yields; each of the leading banks in the chart above who included commercial loan yield data in their 2Q13 financials, reports a significant y/y decline. On the other hand, commercial loan net charge-off rates are both lower than consumer loan charge-off rates and in many cases have fallen significantly over the past year.
In this high-potential, but increasingly competitive, commercial lending and banking environment, banks need to effectively direct their sales and marketing budgets to initiatives that can both continue to drive customer acquisition as well as optimize existing customer relationships. Initiatives include:
Targeting: identify industry segments or geographic markets with strong commercial loan potential. Allocate sales and marketing resources based on market opportunity, competitive intensity, as well as the bank’s own strengths in these markets.
Customer relationship optimization: leverage the full power of the bank by working with other units to generate customer referral and cross-sell streams.
Performance benchmarking:assess commercial banking performance throughout the bank’s footprint. Diagnose reasons for the over- or under-performance of particular groups. Apply these insights to develop programs to raise overall performance.
Loan usage stimulation: develop messaging to drive commercial loan utilization rates, which are currently low by historical standards.
Content development: develop and deliver content that provides answers to customers’ financial needs and position the bank as a trusted financial advisor. Ensure the content addresses the different business and financial challenges of various targeted segments. Distribute the content through multiple delivery channels to reflect changes in how content is now consumed.
Sales tool creation: Invest in sales force automation, sales support tools and training to ensure that commercial prospects are moved seamlessly through the sales funnel and generate a strong conversion rate.
Customer outreach: develop customer communications to support ensure that relationship managers proactively engage with customers on a regular basis, but in particular at critical stages of the customer life cycle (for example, during the first 90 days)
Inbound communications capture: provide a range of options for customers to contact the bank, and direct these customer queries to the most appropriate bank unit or individual.