Author Archives: mronan

Signs of life in small business banking

Over the past year, the main issue in the business banking sector has been the decline in loans to small businesses.  Many business owners claim that the available of working capital for their businesses has dried up, while banks claim that there has been a significant fallout small business loan demand.  At the same time, we are seeing mixed news from surveys on small business optimism.

However, we are now seeing some signs that banks are beginning to turn their attention to the small business market.   This refocusing on the small business market is in part driven by a perception that small business credit woes have bottomed out: Bank of America reported in its 2Q10 financials that the charge-off rate for its small business commercial-domestic loan portfolio had declined for the third consecutive quarter, from a high of 17.45% in 3Q09 to 12.94% in 2Q10.

Although data on small business lending banks can be spotty, there are signs that banks are starting to increase lending to this segment.  In August, the Federal Reserve’s survey of bank lending practices found an easing of lending standards for small businesses.  Chase reported in its 2Q10 financials that business banking origination of $1.2 billion in 2Q10 was twice the level of 2Q09.

Some recent business banking initiatives by banks:

  • Provision of new online services.  In August, First Tennessee Bank introduced the Business Resource Center, featuring a series of tips and resources for businesses, covering banking and non-financial topics.  In the same month, BB&Tlaunched a new series of small business webinars.  In September, U.S. Bank introduced Scorecard, an online reporting too that enables small businesses to track their own spending
  • Advertising: American Express OPEN launched its “Start Booming” advertising campaign in July.
  • Hiring of dedicated small business personnel: In June , Sovereign  Bank accounted that it was adding more than 200 Small Business Specialists.  In August, Huntington Bank reported that it has exceeded the commitment made earlier in 2010 to hire an additional 150 small business bankers.
  • New products and offers: In June, Chase launched an innovative new small business loan program, Chase Loan for Hire, featuring a reduction in the interest rate for every new hire made by the small business customer.  In September, Comerica launched the ‘Office Perks’ campaign, featuring a series of offers, including $200 for opening a business checking account.  The same month, Citibank offered a $250 prepaid card for opening a qualified business checking account and signing up for at least one cash management service

The small business segment has traditionally been very profitable for banks.  So, as small businesses emerge from the recession, bank will want to be sure that they have the elements in place to once again build their small business franchises.

Reports of branch channels’ demise greatly exaggerated

A few months ago, Bank of America reported that it would consolidate reducing the size of its branch network, with speculation that it would eventually close up to 10% of branches (Bank of America has grown its branch network aggressively over the past decade (organically and through acquisition) and even with a 10% decline, the bank would have approx. 5,500 branches).

Some industry commentators saw this announcement as indicative of the long-term demise of the branch channel.   With self-service channels accounting for a majority of service transactions, branch density does not have to be as high, so some branch consolidation is inevitable.

However, the bigger change is the repositioning of branches as platforms for more complex transactions that require one-to-one transactions with specialists.  The staff mix in branches will change, with fewer tellers needed to handle everyday transactions, and greater deployment of sales specialists (Chase recently reported that it grew its sales specialists from 5,454 in 1Q09 to 6,319 in 1Q10).

Direct banks continue to grow deposits

Direct banks continue to outpace bricks-and-mortar banks in terms of deposit growth.  These direct banks continue to aggressively promote high rates, and are also benefiting from consumers’ increased comfort with online banking.

—USAA grew deposits 16% in 2009 to $33.5 billion

—Ally Bank (a unit of GMAC) grew deposits 55% y/y to $30.0 billion at the end of 2009, based on offering high rates on deposits, strong customer services, clear terms and conditions, and a significant investment in advertising.

—American Express launched its Personal Savings from American Express program in the second quarter of 2009, and this contributed to its U.S. retail deposits rising 70% y/y to $26.3 billion at the end of 2009.

–Like American Express, Discover has been on the hunt for deposits in order to create more diverse funding sources for credit card and other lending. Its deposits rose 114% to $14.8 billion at the end of 2009.

–Bucking the high-growth trend were ING Direct, which grew U.S. deposits by only 5% in 2009, having grown at very strong rates in recent years.  In addition, E*Trade Bank reported a decline in deposits in 2009, as it sought to reduce its balance sheet.

Going forward, the rate of growth in deposits for direct banks should moderate (with many of these banks having attained a critical mass of deposits that they can deploy to fund lending).  The focus for many direct banks will shift from aggressive deposit acquisition to customer retention as well as cross-sell of additional products and services.