One of the biggest mistakes that some bankers make is believing that banks are in the business of making loans. It is true that banks make loans, but originating a loan is unquestionably an unprofitable business. Banks earn an acceptable return on capital by keeping loans, not by making them. We recently worked with our lender on a refinancing opportunity that we want to showcase to explain our strategy.
Why Making Loans is Unprofitable
A recent survey from the CFA Institute caught our attention on why wealth management clients leave. 47% of the respondents said they left because of the poor portfolio performance. That makes sense. But, do you know what the second highest reason for leaving your wealth manager was? Communication. 43% of the respondents left because of the lack of communication. That got us thinking about how we can improve communication with our commercial customers.
Commercial loan competition is intense and we recently witnessed a long-term customer of a community bank refinance with a competitor bank for just a 15bps lower loan rate, zero closing costs and no loan fees. This is an extreme example, but the point is germane – competition is intense and community banks need to be creative to manage profitability. We would like to share one particular tactic that we use at CenterState Bank to increase commercial loan profitability. We are certain that your bank can benefit from this same approach and poss
Lenders typically are thrilled when they bring new customers to the bank. However, some of your most profitable customers are already at the bank. Bankers are often surprised that, all else being equal (credit quality, loan and deposit size, etc.), existing relationships are more profitable than new relationships. While part of most lenders’ responsibilities is business development, retaining and enhancing existing accounts is the most important and efficient way to boost your portfolio’s return on assets.
