Retail Biz More Dependable Than Its Commercial Kin
By Charles Wendel
American Banker, May 10, 2002

The latest quarterly earnings reports and recent actions by companies like FleetBoston Financial Corp., Bank of America Corp., and Washington Mutual Inc. serve as a clear sign that banks with strong retail franchises will consistently outperform those with a heavy corporate emphasis.

In a nutshell, retail (both consumer and small-business) offers banks the best tradeoff between risk and return. Retail is the area where banks can demonstrate a sustainable competitive advantage to their customers.

Recent years have shown that banks with a corporate emphasis can produce impressive earnings. Factors contributing to this include the entry of banks into investment banking during an era of unprecedented corporate growth, the explosion of venture capital, and the fast growth of credit-needy industries such as telecommunications.

However, we all know now that this growth also entailed dramatic and largely unexpected earnings volatility. The fierceness of the downturn has caused many banks to rethink their corporate banking strategy. Even some banks focusing on less volatile middle-market lending have suffered sharply increased losses resulting in mediocre returns.

Well-run banks with a corporate emphasis will always experience earnings volatility; well-run retail-oriented banks perform well year in and year out.

Community banks have known this for decades. Many generate top-tier returns by developing close ties to their community and serving the consumers and small businesses in their area. These institutions know who they are and who their likely customer set is, and they stick to their knitting.

Similarly, managers at the best big banking companies have realized that retail is the direction to focus on. Factors such as improved earnings predictability, reduced volatility in credit quality, and the opportunity for extensive cross-selling point these companies toward retail.

Wells Fargo & Co. and U.S. Bancorp have evolved into retail powerhouses, even though their initial emphasis was corporate banking.

When Dick Kovacevich joined the old Norwest (now Wells Fargo), close to 90% of its assets were related to the corporate and real estate activities that had almost destroyed the company. Now, for more than a decade Wells has been known as a bank that fiercely manages its commercial loan concentration risk. Instead of pursuing commercial relationships, it aims at convincing its retail customers to concentrate their business with Wells.

Impressively, in the last quarter Wells increased its cross-selling ratio to four products per household.

One of U.S. Bancorp's foundation banks was Star Bank of Cincinnati, an institution in which the corporate banker was king, though in many cases the returns did not justify the designation. Again, new management shifted Star's focus to the consumer and laid the groundwork for revitalization.

Despite its strong investment banking and corporate commitment, Citigroup Inc. appears to remain the world leader in retail banking. In India, China, and Nigeria, for example, Citi has been an innovative leader in the small-business market, among other areas. This diversity serves to smooth out the earnings volatility that seems to be second nature to corporate banking.

Why do some banks continue to highlight their corporate banking activities, and often limit their investments in retail to do so? At least three reasons drive what is often a misguided emphasis on corporate banking:

Many senior bank managers have corporate pedigrees. The senior management of banks that still push corporate banking grew up in the corporate bank and had personal success in that area, which they know and truly respect.

However, we are seeing more instances of born-again retail bankers. David Daberko, the chairman of National City Corp., has had a very successful career in corporate banking, but in recent speeches and comments, he has shown that he "gets it" when it comes to retail banking.

Corporate banking seems more prestigious to some. Closing big deals with major businesses results in bragging rights, seats on boards, and memberships in exclusive clubs that are good for business contacts.

Success in retail requires roll-up-the-sleeves tactical excellence. Building a great retail bank demands significant financial commitment, creativity, and a strong ability to implement. It is a grind-it-out process, as opposed to the splash of a huge loan signing or a big investment banking deal. It is tough to pull off and demands emphasis on the nitty-gritty.

Serving the corporate customer can, of course, be profitable, but the organizational approach, the profitability analysis, and the products sold need to be redesigned and rethought in light of a tougher competitive environment.

"Go back to your retail roots" is our advice for sustainable and predictable growth.