The growth rate in U.S. C&I loan portfolios has been decelerating in recent quarters (see EMI’s March 4th blog post). To buck this trend, banks are trying to identify and target vertical industries with significant growth potential and/or that have not been effectively targeted in the past.
The following charts show some industries where banks reported strong loan growth in 2013.
(The figures in parentheses show the index of industry-specific growth to overall commercial loan growth, with average growth = 100. For example, Fifth Third’s retail industry loan portfolio grew 26% between end-2012 and end-2013, which is almost five times higher than Fifth Third’s overall commercial loan growth of 5.4%.)
The following are some quick tips for banks to enhance their vertical industry targeting efforts:
- Size the overall market within the bank’s footprint; identify clusters
- Assess industry health and growth potential by analyzing key performance metrics (e.g., gross output, profitability, business formation and survival rates, international trade volume)
- Identify unique financial needs, usage profiles and decision-making processes through a combination of primary and secondary research
- Develop targeted marketing campaigns, to include tailored content as well as investments in industry-specific media (events, trade publications, online and social media sites)
- Create, train and support dedicated industry teams; concentrate team deployment around clusters
Recently-published data from the Federal Reserve indicates that U.S. banks’ C&I loan portfolios continued to grow strongly on a year-on-year (y/y) basis in 4Q12. This industry-wide view is supported by C&I loan data that appeared in quarterly financial results from individual banks. However, these quarterly financials also indicated a continued decline in commercial loan yield, indicating that the commercial loan market is becoming increasingly competitive.
So, how can banks continue to differentiate themselves from their competitors and continue to grow commercial loans, while maintaining margins? One strategy being pursued by an increasing number of banks is vertical industry targeting.
Several banks already following this strategy reported strong growth in industry-specific commercial loan portfolios in 2012:
- Comerica grew average commercial loans 17% year-on-year in 4Q12, but enjoyed well above-average loan growth rates in energy (+46%), environmental services (+31%). and tech and life sciences (+24%).
- TD Bank’s included data on gross loans by industry sector in its 4Q12 financials,which highlighted very strong y/y growth growth in health and social services (+30%), professional and other services (+25%), and government/public sector (+21%).
A number of other banks launched targeted industry initiatives in 4Q12:
- Fifth Third launched an energy lending unit in October 2012, and reported that energy accounted for 12% of new C&I loan production in 4Q12.
- Associated Bank introduced a Healthcare Industry Banking group in November 2012
- Also in November 2012, Huntington Bank launched energy lending and agribusiness initiatives. In reporting 4Q12 financials, Huntington pointed to strength in its manufacturing, healthcare and energy sectors
If your bank is thinking about pursuing a vertical industry strategy, the following are some important considerations:
- Size the number and composition of firms in the targeted industry within the bank’s footprint.
- Conduct primary research to understand market characteristics, financial needs and purchase decision-making dynamics.
- Deploy a dedicated team to develop and implement targeted industry initiatives.
- Create a communications plan, including developing a presence in key industry media (offline and offline trade publications, social media, events) as well as incorporating industry messaging into key bank channels, such as branch and Internet (it is notable that, of the 20 banks with the largest C&I loan portfolios, 15 have industry-specific sections on their websites).
- Develop partnerships with national and local industry associations.
In recent quarters, most U.S. banks have been reported double-digit commercial loan growth, and most bank executives claim that commercial lending will continue to be a key driver of overall loan growth in the coming quarters. With so many banks targeting commercial loan growth, competition has increased, which is leading to declines in commercial loan yields.
To differentiate from their competitors and capture strong commercial loan growth opportunities, banks are increasingly targeting specific industry sectors. Presentations by leading regional banks at this month’s Barclays Global Financial Services Conference highlighted this trend:
- Comerica is enjoying very strong growth in targeting two industry sectors: energy (loans up 68% y/y in 2Q12) and technology and life sciences (+36%).
- Fifth Third’s deployment of a national healthcare team has led to a 40% y/y rise in outstandings. Specialized products include the RevLink solutions platform, which supports healthcare organizations in streamlining collections and managing costs, as well as improving liquidity and working capital. Over the past year, RevLink accounts have risen 30%.
- Regions has five specialized lending groups headquartered in different cities throughout its footprint: energy in Houston, healthcare in Nashville, technology/defense in Charlotte, and both transportation and restaurant in Atlanta.
- Like Regions, Associated Bank has an energy (oil and gas) group based in Houston.
Banks looking to pursue a vertical marketing approach need to develop a comprehensive understanding these industries in order to identify which industries to target, and how to do so. The following are some key questions that banks need to answer in this regard:
- How many firms from specific industries are in the bank’s footprint?
- What is the projected industry growth rate?
- Are firms clustered in specific geographies?
- What are current and projected levels of profitability?
- Do these firms have unique financial needs?
- What is the current level of competitive intensity? Do other banks have dedicated resources to target this vertical?
- What is the customer decision-making process?
- Does the bank have sufficient in-house expertise to effectively target and serve this vertical?