Leading U.S. Banks Maintain Commercial Lending Momentum

July 28, 2014

Strong growth in commercial lending for leading U.S. banks has offset declines in other loan categories in recent years, but coming into 2014, there was evidence that the rate of growth in commercial lending was tailing off. However, EMI’s analysis of second quarter 2014 financials for 14 leading banks shows that commercial loan growth remains robust. Average commercial loans rose 8.4% between 2Q13 and 2Q14, up from a 7.4% y/y growth rate in 1Q14.

10 of the 14 banks reported stronger y/y growth in 2Q14 compared to 1Q14. Most banks attributed the stronger growth to improved business confidence. Other factors that drove commercial loan growth included:

Slow but steady growth in commercial loan utilization: for most banks, loan utilization is well below historic norms, but there has been a gradual improvement in this metric in recent quarters. Fifth Third reported that its commercial loan utilization rate rose from 30% in 1Q14 to 32% in 2Q14. Chase’s loan utilization grew three percentage points in the first half of 2014 to 33%, but this remains well below the 40% level that Chase considers to be the historic norm.
Industry targeting propelling overall commercial loan growth. A number of leading banks attributed a significant part of their growth to their targeting of specific industry segments. Huntington Bank reported that half of its commercial loan growth came from targeted verticals. Comerica reported strong y/y growth in its technology and life sciences (+32%), as well as its energy (+10%) portfolios.

As banks have been pushing to grow their commercial loan portfolios in recent years, yields have been steadily decreasing. So, with banks continuing to report strong commercial loan growth in 2Q14, did loan yields continue to decline? The answer: yields continued to decline on a y/y basis for most banks, as the market remains very competitive. For the 11 leading banks in the chart below, 10 reported double-digit basis-point declines in commercial loan yields between 2Q13 and 2Q14. And two of the banks—U.S. Bank and Bank of America—now have yields below 3%. However, there are some signs that the decline in yields is beginning to taper off; three of the banks—Fifth Third, Capital One and Key—reported q/q increases in their commercial loan yields.

Assuming that economic growth and business confidence continue to grow, demand for commercial loans should also continue to remain robust. The following are four areas where banks should concentrate efforts in order to propel their commercial loan growth:

Identify and target high-potential commercial segments. Banks need to look at both external and internal factors in identifying high-potential segments. The external factors include segment size and growth rates, as well as segment clusters within the bank’s commercial banking footprint. Internal factors include having the required in-house skills, experience and product solutions to effectively target these segments. Industry sector represents the most effective segmentation criterion, given the fact that companies within industries tend to have similar characteristics and needs. However, banks should also look to identify opportunities using other business segmentation criteria, such as ethnicity and gender.
Develop consistent marketing for all commercial banking solutions. Due to their silo-ized structures and cultures, different groups within a commercial banking organization may develop their own marketing and sales communications, which can create confusion for clients. Banks should create an overall value proposition for their commercial banking operations, as well as guidelines for messaging and creative executions, to provide a unified face to the client.
Capture cross-sell opportunities. Again due to their traditional structures and cultures, banks have often fallen short in developing synergies across business units and selling the entire bank to the customer. However, banks like Wells Fargo and Huntington have been steadily growing commercial cross-sell rates. Banks should build programs to grow referrals rates between different business units, and should incorporate both retention and cross-sell goals into commercial bankers’ compensation structures.
Invest in Content marketing. In a world where we are overwhelmed with information, commercial clients will be attracted to a bank that can provide insights and advice on various topics. In developing content for commercial clients, the topics need to be of interest and importance to the client. They also need to be topics on which the bank can speak authoritatively. And lastly, banks need to take into account that the objective of content marketing is not to promote its products and solutions, but rather to position itself as a valuable source of intelligence and advice.

Has the decline in card outstandings bottomed out?

June 19, 2014

A recent American Banker article discussed a credit card rebound, referring to data from the Federal Reserve that showed strong growth in revolving consumer credit in April 2014. This supports findings in a recent EMI blog (“Four Takeaways from Credit Card Issuer 1Q14 Financials“), which found signs of an improvement in credit card outstandings for the leading issuers.

The FDIC has recently published bank data for the first quarter of 2014. EMI’s analysis of this data provides further evidence that the decline in credit card outstandings is bottoming out.

Credit card outstandings fell 0.3% between end-1Q13 to end-1Q14. This marked an improvement from a decline of 0.7% between end-2012 and end-2013.
The overall decline is due to the outstandings performance of the four largest issuers (Chase, Bank of America, Citi, and Capital One) who together accounted for 63% of total industry outstandings at the end of March 2014. These four leaders reported a 2% y/y decline in outstandings.
Outside of these four issuers, outstandings for the rest of the industry rose 3% y/y. Growth in outstandings is led by a number of sectors, as summarized in the following table:

Furthermore, even though the leading issuers have been dragging down overall outstandings performance for a number of years, there are indications that these declines are bottoming out, and loan portfolios are even poised to grow in the coming quarters:

Chase credit card outstandings were virtually unchanged between end-1Q13 and end-1Q14. At its 2014 Investor Day, Chase reported growth in its core card loan portfolio (excluding its run-off portfolio), although its focus has been on growing volume rather than loans
Bank of America reported a 1% decline in card outstandings, but expects this decline in bottom out this year. Card issuance is strong at more than 1 million new accounts in 1Q14 (compared to a quarterly average of about just over 800,000 in 2012)
Capital One reported that its domestic card loan portfolio fell 3% y/y in 1Q14, mainly due to its run-off portfolio. However, it reported that it was seeing loan growth in some key consumer segments, such as transactors. And in a recent Morgan Stanley conference, Capital One claimed that it expects loan growth in July, earlier than anticipated.

So, how can issuers best prepare for outstandings growth? The following are three quick tips:

Set realistic expectations. Don’t expect a return to the outstandings levels that prevailed prior to the 2008 financial crisis and resulting recession. Consumer attitudes to credit card have changed since then, as they see credit cards less as an easy source of credit (evidenced by high monthly payment rates) and more as an effective payment tool (seen in the continued strong volume growth rates)
Prepare the groundwork for future growth. Rather than driving up loan growth (and potential charge-off rates) through overly aggressive pricing offers, issuers should concentrate on the basics: providing a robust product suite with value-added features to meet cardholder spending and borrowing needs; building flexible reward programs; and setting pricing based on appropriate levels of risk and reward.
Focus efforts on existing customers. Traditionally, credit card issuers have focused their marketing on new customer acquisition. Now, a new generation of credit card issuers (led by Wells Fargo and followed by regionals banks that have recently started to issue cards in-house) are growing their portfolios by cross-selling credit cards to existing bank clients. In addition, simple card acquisition is not enough; issuers need to develop communications and offers to drive activation, retention, preference and increased usage, thereby optimizing customer lifetime value.

Five Ways to Reinvent Bank Branches

June 18, 2014

Recent banking industry news continues to highlight growth in self-service channel usage, and an ongoing shift away from branch channels.

The latest data from the FDIC shows that there were 96,684 domestic branches at the end of March 2014, a net decline of 672 branches from the end of March 2013. While the y/y decline is less than 1%, the number of branches has been steadily declining in recent years.
In a recent presentation, Regions reported that branch transactions fell 8% in 2013, while mobile banking interactions rose 59%.
A report by Bernstein Research found that Fifth Third could close nearly 600 branches, based on their deposit levels and proximity to other branches.
Bank of America has continued selling off portions of its branch network, with recent sales of 13 Tennessee branches to First Horizon, as well as 13 branches in Michigan to Huntington Bank.

These trends point to a need for a significant reinvention of the branch channel if it is to remain relevant for consumers, and strategically important for banks. Here are five areas that banks can focus on in order to achieve this:

Avoid both inertia and “following the crowd.” There is a danger that banks avoid making necessary changes to their branch networks because of internal resistance and a cultural predilection to carry on as before. Equally, banks may be inclined to close a significant portion of their branches because they perceive that it the prevailing industry trend. Both of these tendencies should be avoided. Decisions on branch numbers, density, design, staffing and support should be based on strategic analysis of market trends, competitive threats and overall company objectives.
Don’t make branch decisions based solely on cost. Branches represent a significant cost for banks, and with declining branch usage as consumers gravitate to other channels for everyday banking transactions, the tendency will be to cut branches. However, this is a narrow view that does not take into account the sales, service and branding roles that branches play. Although Regions reported an 8% decline in branch transactions in 2013, it also claimed that 80% of sales came through the branch. And while Bernstein Research claimed that Fifth Third could close 47% of its branches, a Fifth Third spokesperson said that the branch remains the most visible brand identifier in their communities.
Test different branch formats. Some of the leading U.S. banks have been piloting different branch formats in their markets. In February 2014, Capital One opened a new Capital One 360 Cafe in Boston (these cafes raise awareness of Capital One’s online bank unit). In May, PNC opened a pop-up branch in Chicago, and SunTrust opened an innovation branch in Atlanta. And banks like Bank of America and Citibank have opened flagship (or “destination”) branches. Banks are looking at these new branch formats not only to assess how they resonate with different customer segments, but also to determine optimal staffing levels and the impact of these branches on overall branch density within markets.
Overhaul branch staffing. Changes in average branch size and format, as well as in the role of the branch, have important implications for branch staffing. Smaller branches require fewer staff, and staff activities will shift from handling everyday transactions to selling and providing specialized service and advice. This has important implications for recruiting, training, compensation, support and internal communications, and banks need an integrated branch personnel strategy with input from multiple functions within the bank, including HR, sales, service, marketing and product.
Leverage branches to build beachheads in new markets. Traditionally, branches have marked a bank’s footprint within defined geographies. Now, some banks are moving beyond these geographic constraints to open branches in out-of-footprint markets to focus on specific segments (such as commercial, private banking and wealth management clients). BBVA Compass has been opening loan-production offices along the East Coast. BMO Harris opened a corporate banking office in Atlanta, well away from its traditional Midwest footprint. As these branches do not target the mass market, product expertise and service quality are more important factors that having strong branch density in a market.