Banks and Banking & Finance and Federal Reserve Bank

ALLEY: Where banks will find growth in the future

March 10, 2012

mike alleyHumorist Will Rogers once said, “A banker is someone that will loan you an umbrella on a sunny day—and ask you to return it when it starts raining.”

Believe it or not, bankers today really do want to lend you an umbrella despite the lingering clouds from the economic downturn we have suffered from since late 2007. The reason is that extending credit to creditworthy borrowers, both commercial and consumer, remains their best earning asset opportunity in an environment of many challenges to growth and earning capacity.

Today’s challenges to bank growth include the continuing anemic economy with gross domestic product growth in 2011 a modest 1.7 percent, increased capital requirements, promised low interest rates from the Federal Reserve, and increased regulatory oversight. Another is reputational challenges from consumers, legislators and government officials’ placing bankers at the bottom of most opinion polls.

A key component of our economic recovery, getting people back to work and returning our economy to prosperity must include bank growth, and banks are now poised to help fuel that recovery.

Though still being tested, bank capital levels are dramatically strengthened and are at their highest levels in decades.

Pressure on loan reserves during the credit challenges is being diminished, allowing banks to once again aggressively pursue loan growth. Many banks deliberately reduced their loan portfolio during the downturn to enhance their capital ratios and now have the capacity, and appetite, to grow it once again. Bankers realize that making loans is still their most important and profitable business.

But don’t expect the “easy credit excesses” of the boom years. A pendulum swings in boom and bust cycles in many industries and it is certainly true in lending. Credit standards will remain somewhat constrained until the economy regains firmer ground and asset values stabilize.

However, creditworthy borrowers will enjoy the advantage of a buyer’s market as aggressive bank competitors strive to offer great rates and terms. This aggression will provide potent fuel for businesses and consumers as we pursue the economic recovery.

To grow faster than their peers, successful banks are pursuing several other strategies, as well.

Changing demographics coupled with dynamic new technologies have unleashed unbound opportunities.

Millions of baby boomers are approaching a dramatic shift in their wealth strategy as they mature. While working for decades to build wealth through earnings, investing in businesses, buying investment properties and investing in growth-focused assets such as corporate stocks, they are now transitioning to more income-oriented investments.

As a result, they are converting hard assets to more liquid assets to increase current income stream. Rather than grow their wealth, they are seeking to reduce risk, merely maintain the wealth they have achieved, and sustain an income sufficient to meet their lifestyle needs.

Addressing the needs of people with this strategy provides an exceptional opportunity for banks to work with customers in providing advisers in financial planning, asset management, insurance, trust and fiduciary services. Successful advisers will provide objective counsel with the ability to draw from a vast array of products, not just their proprietary offerings.

Mobile banking and the ability to react to the dynamic technology shift not only provides an exceptional opportunity for growth, but must be traversed by banks or they will find themselves gone the way of 8-track tapes and VCRs. Effective use of technology and embracing virtual banking can be cost-beneficial and increase the ability to scale products to accommodate more customers.

For example, an online personal financial planning model with easy question-and-answer dialogues can introduce these concepts to many customers who would have required a one-on-one interview. This allows for pre-qualification and referral to the appropriate professional.

Banks must deliver their products electronically but they must develop new “value-add” services that commercial and consumer customers will find critical in their lives.

Using the power of social media, banks can provide meaningful education and advice to customers by providing honest and meaningful discussion about day-to-day finances, debt-to-income models, managing credit card debt, understanding long-term saving and retirement plans. Development and maintenance of an unbiased platform with value add creates trust and results in a valued long-term relationship that is mutually beneficial.

Many competitors are vying for the pocketbooks of consumers and treasuries of businesses. The absolute real growth that will occur will not be sufficient for all bank and non-bank competitors to realize their growth objectives.

Accordingly, the winners will be those that listen and understand their customers, execute soundly and deliver more than expected.

The others will be acquired, absorbed or simply fade away. Some things never change.•

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Alley is chairman of investment firm Patriot Investments LLC. He is a former president and CEO of Fifth Third Bank, Central Indiana, and recently served as interim chairman and CEO of Integra Bank Corp. in Evansville. Views expressed here are the writer’s.

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