Author Archives: mronan

FDIC Quarterly Report Shows Upsurge in Bank Lending

The FDIC’s quarterly banking report shows signs of strong lending growth.  As increased lending is a sign of growing economic confidence, this report is a positive indicator both for the industry, which has been struggling for revenue growth in recent quarters, as well as for the economy in general.

According to the FDIC:

  • Total loans and leases rose 1% year-over-year (y/y) and 2% quarter-over-quarter (q/q) to $7.5 billion at the end of 4Q11. The charge-off rate was 1.37% in 4Q11, down 93 bps y/y and 9 bps q/q. The charge-off rate is now at its lowest level since the second quarter of 2008, just prior to the full onset of the financial crisis.
  • Overall loan growth was driven by strong growth in commercial and industrial (C&I) lending. End-of-period C&I loans rose by 14% between 4Q10 and 4Q11, and by 5% between 3Q11 and 4Q11. The C&I net charge-off rate fell 76 bps y/y and by 5 bps q/q, to 0.78% in 4Q11.
  • Drilling down into C&I lending, small business lending (defined as C&I loans of less than $1 million) fell 3% y/y, but rose 1% q/q, reflecting other recent indicators that banks are returning to small business lending. And it is notable that growth in small business lending is most evident among the largest banks.

So following a number of years of retrenchment, how well prepared are banks to ramp up their lending activity? To position themselves to benefit from an overall resurgence in lending, individual banks need to:

  • Undertake a comprehensive assessment of their capabilities and processes, covering vital areas such as product portfolios; positioning and marketing activities, sales structure and support, as well as customer communications
  • Benchmark bank performance against competitive best practices
  • Identify operational areas that are under-performing, and
  • Implement initiatives to quickly correct these deficiencies

Financial institution financials reveal differences in marketing spend intensity

A review of reported marketing/advertising expenditure by leading financial institutions revealed the following trends:

  • 2011 spend levels: Five FIs (JPMorgan Chase, American Express, Citigroup, Bank of America and Capital One) each spent more than $1 billion on marketing in 2011.
  • 2010-2011 trend: Of the 12 FIs included in the review, six increased marketing spend by double-digit percentages in 2011, led by Citigroup (+43%) and Capital One(+40%). Four FIs reduced marketing spend in 2011.
  • 2007-2011 trend: Taking a longer-term view, we see that although Citigroup and Capital One had very strong growth in 2011, spending was actually down relative to 2011, indicating that these banks’ recent strong growth is more of a return to historic norms. JPMorgan Chase, Wells Fargo and PNC all had strong growth between 2007 and 2011, but each of these FIs had made a big bank acquisition during this period.
  • Marketing as a percentage of revenues: To eliminate the effect of merger and acquisition activity, and get a gauge on marketing investment intensity, we also looked at marketing as a percentage of net revenuefor 2007 and 2011.
    • American Express has the highest level of marketing spend intensity, with its 2011 marketing expenditure representing 10% of net revenues in 2011, up 70 basis points from 2007
    • Other leading FIs for marketing investment intensity are Discover (no branch network, national credit card operation) and Capital One (regional branch network, national credit card operation)
    • Among the regional national banks, JPMorgan Chase has the highest level of marketing intensity (3.2%), ahead of Citigroup (3.0%). Chase, which has both an extensive branch network and a national credit card operation, actually increased marketing intensity by 33 bps from 2007 to 2011. Citigroup has a limited U.S. branch presence, but again has a national credit card franchise.
    • Bank of America’s market spend intensity fell from 3.5% in 2007 to 2.4% in 2011
    • Wells Fargo maintains significantly lower marketing spend levels than its national bank competitors, with a marketing spend intensity of 0.7% in 2011.  However, it was recent named as the leading U.S. bank in The Brand Finance Branding 500 rankings, indicating that topline marketing spend does not necessarily correlate to brand strength.  However, it should also be recognized that, unlike some of the other leading banks, Wells Fargo’s operations are mainly concentrated within its retail banking footprint.

 

In terms of setting optimal levels of marketing investment in 2012, financial institutions face competing forces. On the one hand, many FIs have established cost containment programs with defined targets, and this will put downward pressure on marketing spend. On the other hand, the above table shows that many FIs have reduced their marketing intensity levels in recent years. With signs of economic recovery now emerging, these FIs may need to increase their marketing investment to compete effectively in a growing market.

Strong growth in commercial lending by large U.S. banks

Much of the coverage of U.S. banks during the 4Q11 earning reporting period focused on their continued struggles to generate revenues, with some noninterest income categories under pressure. However, most of the big banks did show signs of growth in lending, with commercial lending at the forefront.

The table below looks at y/y and q/q changes in average non-CRE commercial loan portfolios for some of the leading U.S. banks.  Of the 12 large banks listed below, eight enjoyed double-digit average commercial loan growth over the past year.

In reporting quarterly financials, most banks indicated strong potential  for additional commercial lending growth in 2012, although most were at pains to point out that this is dependent on continued economic recovery and improving business confidence.

Of course, the strong growth in 2011 follows declines in loan portfolios in 2008 and 2009, and relatively anemic growth for many leading banks in 2010.  Due to acquisitions and changes in organizational structures, long-term comparisons are not always relevant, but in many cases, leading banks have a long way to go to build average commercial loan portfolios up to pre-financial crisis levels.  And banks also need to recognize that, while an improving economy, should boost overall commercial lending, they will need to make significant investments in marketing and sales to maintain and even build their share of the commercial loan market.