and Planning for the Next Wave of Franchise Expansion
By Arp D. Trivedi, DEI
The year 2007 proved to be a
difficult year for the banking industry. Literally every segment of the market
was hurt by the “economic slowdown” and the erratic nature of both the
commodities and capital markets. In this context, it is interesting to
understand the stock price trends of leading indices, overall market forces, and
the windows of opportunity that lie in wait for western independent bankers 2008
Overall, the western bankers
fared well in this recent onslaught. The 66 banks in SNL’s composite index
lost just over 20% of their aggregate stock price, but fared better than many of
their peers throughout the industry. The following table reveals much more about
the performance of the west versus the rest:
The overall SNL Bank index
lost nearly 32% of their aggregate stock price in 2007. The micro-caps, those
banks with market capitalizations less than $250M, staved off the larger losses
as well. But they did so with slimmer interest margins and overall weaker
earnings compared to their peers in the western states. Overall ROAA for the
western banks was 1.42%, exactly twice the micro-cap banks’ aggregate return
of .71%. Phenomenal! What to do now?
One could imagine that it is time to take a breather. However, with the pending economic uncertainty and the continued price pressures on commodities, now is the time to develop a sound strategy.
A specific focus should be
continued expansion. It is critical to do this at the right pace, in the right
markets, and at the right time for a successful market expansion plan. With the
recent performance of western banks, they are positioned to extend their high
performance franchises into more and more markets. A specific methodology exists
to achieve this level of success.
By reviewing data
combinations, one can derive overarching strategies, such as: de novo,
convenience, hybrid, turnaround, and even hub/spoke. Qualitative factors are
also in play, demanding bankers consider the macroeconomic components of the
marketplace, like: general economic development, employment, infrastructure, and
various incentives, to name a few.
The second component is the
service delivery model of the franchise. The market will drive the design of a
new or renovated location’s service delivery method. Whether it is a
traditional teller line, nouveau teller line, remote teller system, or complete
electronic delivery via Check21-enabled ATMs, banks must seek the best method
for servicing customers.
Finally, financial impact is
paramount. Consolidated balance sheets and income statement analysis, including
the potential impact on critical market indicators (EPS, P/E, EPS growth, etc.),
is incredibly important. Understanding the impact upon capital, fixed assets,
and earnings remain. Determining net present value of proposed projects cannot
be neglected either.
Data as of 03/18/08. Institutions not yet reporting year end results are not included.