With the regulatory landscape stabilizing and Banks largely settling in with previously unheard of Capital levels, the Industry appears ready to move forward with many new challenges. Digital transformation is probably the biggest strategic challenge and there is increasingly more pressure to react with technology investment. When the Chairman of Wells Fargo sees Silicon Valley as the Bank’s biggest threat, there is no denying that the technology revolution has arrived in Banking.
On the current events agenda are the historically low interest rates and the pressure on net interest margin. Couple this with the challenges of growing revenue with the new risk reality and the CEO must be a juggler to balance investment for the future and today’s profitability.
Given this reality I believe the objective of driving the efficiency ratio to the low 50’s is no longer acceptable. When major Banks and many small Banks are trading near or below book value, with capital historically high and risk appetites historically low, the street is telling us the model is no longer acceptable. I would suggest an efficiency ratio of 45% should be the new objective.
I recently spoke to a small Bank president and he was lamenting that he needed to increase revenue $7.2 Million to get his efficiency ratio to 45 %. After a quick look at the numbers it was apparent the same could be done with an approximate $4.0 million reduction in expenses. Now the obvious strategy should be expense reduction and revenue growth. However, when revenue growth is such a challenge the emphasis should be on expense reduction. In order to achieve meaningful progress in efficiency ratios Banks must step outside the box and look at how to combine investment in strategic objectives with real near term expense reductions.
We at LoBue Group have been called into Financial Services Companies to hear “We have just spent many millions on new technology and have not reduced running rate expenses”….this is what I call the “Magic Wand” solution. It just does not work unless it is combined with a deep dive re-engineering of customer touch points, service delivery and processing. All too often technology investment ignores the effectiveness of the staff utilizing the new environment. If investment in new systems is done right there should be significant running rate expense reductions attached to the program.
It is amazing how much opportunity one can uncover when a critical look at customer facing vs non customer facing labor across the institution is analyzed. Imagine a clean piece of paper where you design the frontend of the business and then say “what is the best, least cost infrastructure to support this business”….I have always come up with a backend that is 1/2 to 2/3 of the existing base. Going through this process can provide a good target which will get that efficiency ratio below 50% and hopefully improve the market cap significantly.
Banks have proven their grit over the past several years in spite of irrational, overbearing regulatory changes. Putting the same deliberate emphasis on reinventing the organization model is now in order.
In every industry, the innovative, customer sensitive, efficient organizations are the leaders. The Banks that grasp the new reality and re-invent themselves will be the industry leaders of tomorrow.
Carl LoBue, Chairman
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