There are many reasons why some customers are more debt-averse than others. Research has shown that millennials are particularly reluctant to take on debt and are also teaching their kids, Gen Z, to avoid borrowing. However, lenders need to understand how to position their loan products and provide advice for when taking a loan makes good sense for the customer.
Tag: Cost of Capital
As we have written before, the size and performance correlation is overrated in banking. In good times, asset size does have an affect efficiency and hence earnings, but in bad times, size negatively impacts earnings. If you take the business cycle into account, over a 20+ year period, there is little correlation between size and banking. As a rule of thumb when a bank grows risk increases. Few bankers understand how to grow assets at decreasing or steady marginal credit and operational risk.
As we have said before, every bank pays for growth. The most obvious case is when a bank hires staff to bring in and service new customers. Marketing, new branches, technology, capital and many other items all contribute to a bank’s growth and are all investments in growth that are often made. In fact, the need to grow is probably the single biggest driver for bank CEOs. While many bank managers say “shareholder return” is their number one priority, their actions speak otherwise.
Below you can download an Excel worksheet that will help you calculate the cost of your capital. Your cost of capital is important to know for several reasons. Mostly, it gives your board and shareholders a yardstick in which to gauge a bank’s return. Produce over your cost of capital and you will be able to attract more capital. Produce under and, well, you are going to have to do some good marketing to talk investors into believing you are better than the next similar investment alternative.