Strategy 101: Part IV  

By Cass Bettinger, Cass Bettinger & Associates

Previously, we have discussed the shareholder value equation [ROE = ROA + EM (the equity multiplier)] and two of the six drivers of ROA, interest income and interest expense. 

All bank strategies, nonfinancial as well as financial, flow  from a thorough understanding of this formula and the drivers of both ROA and the equity multiplier.

The third ROA driver is noninterest income, which has become increasingly important as market forces continue to exert pressure on the net interest margin.

Noninterest income sources fall into four main categories, each of which has its own unique drivers and, therefore, requires a unique set of well-designed and executed strategies. These categories are 1) demand deposit-related fees (e.g. NSF/OD), 2) loan-related fees (e.g. commitment fees, past-due fees, etc.), 3) trust and investment-related fees (e.g. portfolio/asset-management fees), and 4) ancillary business fees (e.g. insurance of all kinds, leasing, investment banking, etc.)

In the past decade, overdraft courtesy/privilege programs have been the primary (and most profitable) source of new noninterest income for most banks - and still represent an opportunity for those banks which somehow missed the boat or which have not reenergized in some time their programs with new marketing strategies. Most banks offering these programs report that related fees have stabilized or declined and many banks report that a reemphasis on targeted marketing has been effective.

Another traditional noninterest income source for banks of all sizes has been mortgage lending. With mortgage loan products now a commodity, success requires excellence in realtor/developer networking and the strategic use of technology to provide added-value (time and location convenience, fast turnaround, etc.) to customers while at the same time reducing per-unit costs. Most banks can do a much better job in these areas.

Banks entering the Trust/Wealth Management business face significant up-front costs and a long payback period. However, given the favorable demographics in most markets, the opportunities for banks already in the Trust/Wealth Management business are significant but require new strategies such as 1) aggressive sales leadership coordinated with all other business units, especially commercial lending (e.g., joint sales calling), 2) comprehensive, differentiated value propositions and related marketing structured around target segment needs (e.g., business owners), not around lines of business (silos) or generic product features, 3) formalized Trust/Wealth Management strategic planning coordinated with other business units with specific objectives that meet or exceed required financial contributions, 4) a comprehensive branding/perceptions management strategy directed at specific target markets, 5) the strategic use of technology to add value for customers (benchmarking non-bank competitors can be enlightening in this regard) while reducing per-unit costs, 6) team and individual performance objectives and true accountability for results (no excuses). Most banks are still not managing Trust/Wealth Management as a core business!

Like any low-profit margin business, success in Investments requires high volumes and low per-unit costs/high efficiency. Most banks in the Investment business are a) not target marketing aggressively to the right customers/prospects, b) are not engaging effectively the entire point of sale workforce in selling investment services to build customer relationships, and c) are not consciously managing target market perceptions through a well-thought-out branding program. Opportunities exist for new strategies in all three areas. There is no excuse, for example, for a 3 or 4 person Edward Jones office significantly outselling a community bank with 100 employees - and a huge captive customer base - in the same market.

Finally, banks must have, and manage effectively, strategies to control waivers. High performing banks, for example, typically collect 95 percent or more of all NSF and OD fees while many less successful banks are consistently below 90 percent, in the process leaving significant money on the table; it’s all a matter of management focus and commitment.

  <back to December 2006 Directors Digest>