Yesterday's Thinking Saps Corporate Banking Profits
By Charles Wendel
American Banker, January 10, 2003

Over the long term, a bank's consumer and small-business activities will outperform almost any corporate banking effort.

Retail is less prone to volatility, takes smaller credit hits, provides the potential for strong operating efficiencies and cross-selling, and is a simpler business.

However, both the middle-market and large corporate areas can continue to be attractive for some players. Success demands breaking from a number of traditional approaches to job roles, internal processes, and even product offerings.

Among the best practices are the following:

Insist on organizational streamlining. Today many relationship managers in effect can focus to one degree or another on one of three activities: sales and marketing, credit-related tasks, or administrative activities. A comment made several years ago by a relationship manager at one of our clients typifies what we see at other banks: "Selling is what I do after everything else."

Corporate banks cannot afford to have their most expensive and sales-oriented professionals spending the smallest percentage of their time selling, but some allow this to happen.

Bank management must provide direction to relationship managers about how to spend their time. Banks should increase their selling time and sales goals while limiting the time they spend on credit and administrative issues. As part of a recent best-practices assessment, we found one bank that redesigned the relationship managers' job so that they spent 80% of their time in sales-related activities.

The imperative to cross-sell products to the corporate customer, the increased complexity of the products offered, and the need to decrease operating expenses make it necessary, rather than just an option, for banks serving the corporate market to redefine the roles and responsibilities of relationship managers. Banks should promote a team approach for serving this market, with credit specialists and operations personnel freeing up relationship managers' time. Such changes can improve both the quality of the credit decision and the speed of problem resolution.

Avoid lending-only accounts. Richard Kovacevich, the chief executive officer of Wells Fargo & Co., may have been the first bank leader to decry the relationship manager's primary focus on loan generation. For him, loans are a means to an end (the sale of multiple products, many of them fee-based) rather than the end itself. Remarkably, to this day many middle-market bankers see themselves primarily as lenders rather than active managers of broader relationships.

A lending-only focus in the corporate market, unless it involves secured/highly-structured loans, usually means subpar returns for the bank. Many large money-center banks have recognized this and now deny credit even to blue-chip customers that do not bring in other, more lucrative fee business. One bank we know rewards bankers on the basis of deposit and fee-related business; that approach sets the tone for a changed emphasis.

Conversely, emphasize and exploit lending expertise. You cannot build a good business by being a vanilla, commodity-type lender.

While some general lending will always be required, a corporate banking group can gain a strong competitive position only if it can exploit an industry expertise, develop a structuring capability, or build a specialized finance group. With this expertise comes an effective and low-cost marketing tool, as the bank becomes known as the place for commercial mortgages or as an expert in medical office lending, etc.

Analyze and rebalance portfolios. Whenever we dissect a client bank's middle-market portfolio, we find a significant percentage of smaller and low-potential accounts that could be more efficiently served by an officer handling a hundred or more accounts, rather than 30 to 40. In one case, when we pointed this opportunity out to a senior middle-market banker, he asked, "But what would the bankers (remaining in his group) do all day?"

Good point. That bank has since been acquired, and most of those bankers dismissed.

Banks need to differentiate their approach to the lower-end middle market from that of the larger midsize company. The lower end will increasingly overlap with small-business activities and will leverage the small-business unit's expertise at credit scoring, standardization, and centralization.

Require the business to justify itself. In an approach akin to zero-based budgeting, senior management needs to demand a clean-sheet approach to its corporate banking activities.

This analysis should require the line of business to address the following questions: Who is the target customer and why? What marketing plan exists to build wallet share? How can the resources of the entire bank, rather than the middle-market or corporate banking group alone, be harnessed to increase profits? What level of returns is likely? What needs to happen, both on the cost and revenue sides, to generate these returns?

We could, and in fact did, make many of the above comments five to 10 years ago. Some banks changed their approaches and made themselves market-centric. Our recent best-practices study showed that top performers are rethinking the products sold, segments served, and the distribution methodology employed.

However, many corporate banking leaders have been hesitant to change. For example, one senior manager commented to us that business development officers "would not be employed at my bank while I'm still here."

Standing still is not an option for the corporate banking manager. Frankly assessing your corporate effort is step one. Failing to act on that analysis may allow senior management to avoid some tough near-term decisions, but over time it will require even more dramatic action.