We recently received a call from a frustrated banker attempting to retain an existing borrower. By way of background, the borrower approached our banker 11 months ago asking for a construction through perm loan. The proceeds were used to construct an owner-occupied industrial and distribution center.
Customer lifetime value (CLV) is defined as the total profit generated from a customer over the entire life of that relationship. In banking, CLV is a very important concept because of the high cost sourcing, underwriting and originating commercial loans. On the first day a commercial loan is booked, the return on equity (ROE) on that loan is negative. The bank’s profit is generated as the borrower pays interest over the life of the credit and, generally, the long
A couple weeks ago we ran an article on how to price loans for default volatility (HERE). In it, we discussed how to price in the variability around default risk and showed multifamily and owner occupied commercial real estate examples. Many banks saw our data on ten-year loss rates and volatility around credit cards, commercial and residential constructions and patted themselves on the back that they have no or limited exposure to each of those sectors.