How to Generate Loan Growth

First quarter numbers are in and loan demand is still dragging, which is bad news for banks. How do they plan to improve in today’s slow-growth economy?

Asset growth and credit quality are the top priorities for banks and credit unions of all sizes, according to the March 2012 BAI Demand Pulse survey. And no wonder: most financial institutions currently are saddled with excess deposits and need to generate loan growth to improve spread income.

Let’s look at this in more detail to figure out the source of the problem. One of the key drivers of retail loan demand is consumer confidence. Beginning in 2009, BAI launched a consumer confidence index specifically for the financial services industry incorporating consumer attitudes toward their primary financial institution (PFI) in the form of trust, likelihood to bank with current PFI one year from now and likelihood to recommend their PFI. Using 2009 as a baseline, the index fell to 77 in 2010 but has since improved to 108. Therefore, loan demand should be improving as consumer sentiment improves over time.

Most financial institutions envision asset growth will be achieved by three primary methods, according to the BAI Demand Pulse: a focus on specific high-value customer segments; increasing the share of wallet (deposit and loan balances) of existing high potential customers; and bringing in new customers of higher quality than the existing customer base. So, which specific customer segments do financial institutions want to focus their efforts on?

While financial institutions do seek to serve all customer segments within their marketing areas, our survey revealed that the three top targeted segments in the current environment are small business owners (81%), wealth/private banking clients (71%) and mass affluent customers (67%). Although the definitions of these segments vary by financial institution, typically small business customers are those with annual sales under $10 million in revenue and loans of less than $1 million. Mass affluent are customers with investable assets of between $100,000 and $1 million and wealth/private banking customers control assets of more than $1 million.

The top two methods used to target these segments are focused advertising and marketing campaigns and customized product offerings. Implementing any strategy, especially deepening relationships with key customer segments, will require top-notch execution by frontline employees. Per our survey, the top sales and service areas for investment are: sales training programs focused on customer needs; customer relationship management (CRM) systems; and core systems upgrades and/or replacements. Closely related to CRM is the desire to integrate technology systems and break down the silos of information currently housed in various operational systems. Banks see the biggest benefits of technology integration as improving customer service, having consistent information across channels and utilizing the core systems to the fullest.

Serving these higher value (balance) segments does not come without challenges. First, customers who have larger balances tend to spread them out among more financial institutions so creating a value proposition for consolidation will be difficult. Second, higher balance segments are also more likely to keep more of their balances in higher cost-of-funds deposit products or be more demanding on loan rates, hence spreading their business among multiple financial institutions, often for rate advantages. Third, many high-balance segments have lower loan needs due to higher affluence, which typically means more savings and less borrowing. Targeting less affluent customers for loan growth would actually enable banks to access a larger share of the market.

Regardless of segments targeted, implementation and execution will separate the winners from the losers in this new segment-driven banking era.

Mr. Riddle is a director, research and market intelligence, at BAI. He can be reached at [email protected].