Before there was banking, there was trust services. Discussed by Homer and then Aristotle, the concept has its roots in both Roman and Islamic law. However, it was English law in the 12th century that had to perfect the structure for noble landowners to pass their estate on to the next generation. As anyone that has seen Game of Thrones will attest, that can get messy. By the turn of the century, chances were that if you were not a savings bank, you were a “Bank & Trust.” These days, about 1 in 6 community banks have trust departments.
Having more bankers to throw at a borrower or more assets to flaunt does not make a bank more effective. Strategy beats size every time, but bankers need to be smart how to position themselves against large banks. When it comes to loan mix, community banks need to be careful to assemble their assets with enterprise risk in mind. In particular, the increase in commercial real estate (CRE) and specifically, High Volatility Commercial Real Estate (HVCRE) is starting to be a concern.
If you are a bank that believes delivering superior service is a function of being friendly and knowing your customers, then likely your bank lacks a strategic advantage.
Last week we wrote about how some banks are already starting to raise rates and how banks are adding deposits due to lower energy prices creating more disposable income. In the past, we have also showed how today depositor, given the rate environment, is more fee / attribute sensitive, than rate sensitive. Because of the confluence of trends, community banks must make sure to get their deposit pricing right in order to optimize their positioning.
If you want to change the face of your bank, one of the fastest ways to do it is by changing the compensation structure.
Falling energy prices have been front and center in the headlines lately, which is a good thing for retail-oriented banks. Experienced retail bankers understand that consumers often react to lower energy prices by treating it as a windfall and increasing their savings rate. Statistically, the correlation over the last 5 years is that energy prices explain approximately 68% of the savings rate – a correlation that is exceedingly predictive. The question is, what is your bank doing to take advantage of this trend?
In case you are one of the few banks that don’t track direct (Internet) banks in your deposit surveys you should, as they continue to lead the market when it comes to deposit pricing. Our MarketRates Insight rate survey’s set off alarms when Discover Bank moved their retail money market rates up 5 basis points at the end of last month, while their 5-year certificate of deposit rates raised 20 basis points to 2.20%. More interesting is the fact that they introduced a whole series from 3 months to 10-years of jumbo CDs all at very aggressive rates.
Community banks are fighting hard to maintain interest margin; trying to overcome intense competition and a low interest rate environment. There is currently an unusual market phenomenon that is compressing margins by up to 60 basis points. This phenomenon is little discussed and is going mostly unnoticed by many bankers. Community banks making fixed rate term loans today without an interest rate hedge are at a tremendous disadvantage to banks that are using loan hedges. The amount of net interest margin compression over the term of the credit is substantial.
What is your bank’s goal for your savings account compared to your money market account? The reality is that most banks haven’t thought of it and have their savings and money market accounts established because that is how they always have done it and that is what the competition does. The reality is that when you look at the aggregate performance statistics – balances, lifetime value, duration, convexity and cost to administer, there is very little difference. While some banks do use each product tactically, most do not.
Tomorrow night’s Powerball lottery will be the world’s richest at an estimated $1.4B. Bankers, despite the odds, are even buying tickets both individually and in syndicates. The ironic part is that with such a big pot, the odds of you winning don’t change (still 1 in 292 million, or about the same as a quarter coming up heads 28 times in a row), but the expected winnings actually go down with a larger jackpot, not up. The higher number of players increases the odds of you splitting the jackpot.
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