Accelerate Commercial Loan Growth Through Vertical Industry Targeting

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.

C&I Loan Growth is Slowing; How Can Banks Maintain Momentum?

The FDIC’s Quarterly Banking Profile reported this week that commercial and industrial (C&I) loans rose 7% between 2Q15 and 2Q16.  This represents a decline from growth rates in 2Q15 (+8%) and 2Q14 (+9%).

With this decline in commercial loan growth, how can individual banks develop structures and strategies to continue to drive growth in this key area?  The following are some key considerations:

  • Identify and communicate key differentiators.  Banks should gain insights from internal (salespeople, product staff, key executives) and external (current clients, suppliers, other partners) on what the bank’s key strengths and limitations are in serving commercial clients.  Banks should combine this research with in-depth competitive analysis to identify key differentiators.  These key differentiators then need to be consistently communicated across all communications channels.
  • Identify and leverage opportunities in vertical industry sectors.
    • Size and profile the opportunity: identify industry clusters within the bank’s footprint and/or sectors that have strong growth potential and that have traditionally been underserved by other banks.  These sectors should be profiled to identify the key business and financial challenges of companies in this sector.
    • Develop and implement a plan to target this sector, which may include establishing a dedicated industry group (First Tennessee Bank recently created a dedicated music industry group in Nashville), and engaging with this sector (e.g., by creating industry-specific content and collateral, as well as participating in, sponsoring and even hosting industry events).
  • Develop thought leadership infrastructure and assets.  Banks can develop a competitive advantage by creating compelling content in a mix of formats (reports, newsletters, infographics, blog posts, videos, surveys) and presenting this content in a consistent and visually-appealing format (e.g., using bullet points for quick scanning, images, callouts).  Many leading banks have now created branded portals that provide content, tools and advice.
  • Leverage captive channels and use non-traditional channels for communicating to prospects.  Traditional B2B marketing channels are under pressure, as business readership of trade publications is falling and direct mail response rates continue to decline.  Banks need to invest in a broader mix of marketing media, including online, email, social media and events.  Banks also have significant opportunities to leverage their existing service (and sales) channels, including branch, call center, online, mobile and social media.
  • Develop a commercial banking presence in non-traditional markets.  Unlike retail banking, banks have more scope to develop their commercial banking operations outside their traditional footprint by opening beachhead offices in markets that have growth potential (overall or for specific industries) and where the bank feels it can compete effectively with incumbents.
    BMO Harris recently opened a commercial banking office in Dallas
    Wells Fargo opened a commercial banking office in Portland, Maine.

Although C&I loan growth has slowed, banks remain committed to continuing to grow their commercial loan portfolios.  Banks that can clearly articulate and deliver their value proposition (and competitive differentiation) to their commercial clients and prospects will have increased their chances of success in this dynamic environment.

Leading U.S. Banks Continue Robust C&I Loan Growth

The leading U.S. banks reported a 10% y/y rise in average commercial and industrial (C&I) loans in 2Q15, based on an EMI analysis of the FFIEC call report data.

leading_banks_C&I_loans_2Q14-2Q15

Interest income on C&I loans rose 5% y/y, indicating that downward pressure on commercial loan pricing persists.  This is reflected in the following table, which shows consistent y/y declines in commercial loan yields.  However, there are signs that yield are now stabilizing.

commercial_loan_yield_2Q15

Most leading banks report that the commercial loan market is highly competitive.  So, how are banks managing to grow their C&I loan portfolios at double-digit rates?

  • Banks are targeting specialty segments.  Many leading banks reported that targeted vertical segments drove overall commercial loan growth in the second quarter.  Comerica’s average technology and life sciences loans rose 20% y/y, compared to only 3% for total Comerica middle market loans.  And while KeyBank grew its commercial, financial and agricultural loans by 12%, loans to the transportation sector grew by a hefty 42%. A bank’s selection of target segments depends on a number of factors, including segment size and growth, concentration of specific segments in their footprint; and the bank’s heritage in serving this segment.  To more effectively build a presence in specific vertical markets, many banks are now creating dedicated teams that include industry experts.  In addition, a number of banks are developing segment-specific content, which both establishes bank credibility and creates opportunities for prospect engagement.
  • There are signs of growth in commercial loan utilization.  As the economy and business optimism improves, companies are more inclined to invest to grow their businesses.  A number of banks are now reporting a slow-but-steady rise in commercial loan utilization.  Regions reported a 97 basis point increase in line utilization during the quarter. Equally, Fifth Third’s commercial line utilization rose from 32% to 33% in the second quarter.
  • Banks are increasingly focused on optimizing commercial client lifetime value.  As in consumer banking, banks are seeking to optimize relationships with commercial clients by taking a lifetime value approach and focusing not just on acquisition, but on all key stages of the relationship (including onboarding, retention and cross-sell).  The effect of this approach for banks can be significant.  Since the start of 2010, Huntington Bank has grown commercial relationships by 36%, but commercial relationship revenue by 72%. The percentage of Huntington’s commercial clients with 4+ services rose from 32.6% to 43.4% over the past three years.  This long-term perspective may also help explain why yields on new commercial remain low.  In discussing its quarterly financials, KeyBank claimed that “if we believe we have a client who wants a broad relationship and the credit metrics look good for us, we know that over time we can generate a profitable relationship, even if we are pressured a bit on the loan pricing.”