Comparative analytics in commercial banking
In recent years, many banks have made significant investments in the commercial business to drive growth and to deepen customer relationships. These investments have come in the form of hiring of relationship managers, adding treasury management products and staff and installing new technology. At the same time, interest spreads on commercial loans have declined and capital and liquidity requirements have increased, putting pressure on profitability. Under those circumstances, have these investments been as productive as desired?
Unfortunately, the analytics that executives currently must rely upon to answer that question are often inadequate. Bankers typically can measure progress against their institution’s past performance or across markets, but they often lack metrics to assess performance gaps or identify improvement opportunities relative to an industry norm or an objective performance standard. While there are industry metrics that provide competitive information on very specific elements of the business, such as loan pricing, these are not directly linked to other metrics that might provide additional insights, such as growth in relationships.
There are some survey-based performance metrics available. However, the responses may not be accurate or comparable among banks. The result is that executives have to juggle multiple sources and often must rely more on intuition than hard data when determining their performance relative to competitors or identifying the best opportunity to improve performance.
The dearth of reliable industry benchmarks means that executives are forced to set a course without the benefit of important guideposts. For example, expanding treasury management services and sales has been a strategic focus for many banks; however, it is difficult to definitively state what constitutes best-in-class performance of treasury management sales within a comparable segment of commercial customers. This has obvious implications for hiring and for goal setting.
Similarly, determining market share for specific geographies and understanding relationship manager productivity for comparable segments would be immensely helpful in allocating resources and for informing compensation formulas. Comparative benchmarks would help commercial executives to objectively evaluate their performance in fundamental areas such as growth in primary relationships, cross-selling and the productivity of relationship managers. Commercial bankers should undertake to build foundational benchmark metrics for their businesses. Reliable, comparative benchmarks have been developed and are widely used in consumer banking.
Some people argue that the commercial business is more complex and that benchmarking is therefore impractical. Clearly, commercial banking is different from consumer banking. The former has a different product and service array that is delivered primarily through relationship managers, who are often assigned to specific customer segments. Yet, reason tells us that the menu of products and services is finite and therefore it should be possible to define a list of core offerings that are common to like-sized banks.
Similarly, it should be possible to derive a common definition of customer segments. An approach for standardizing risk-ratings of loans could be developed. So, the issues related to the complexity inherent in the commercial business can be surmounted and should not prevent the creation of comparative analytics.
As a first step, performance analytics should be developed at the account and customer level in areas that are crucial to the business, such as relationship growth, customer base penetration, fees and margins and relationship management. To ensure comparability, the metrics would need to be developed using common segment definitions. In addition, metrics regarding loans would need to normalize for risk-ratings. At a minimum, the universe of metrics should include:
- Growth and attrition of primary customer relationships;
- Penetration of products and services within relationships, including treasury management services and capital markets products;
- Utilization rates of products and services;
- Growth in average balances of credit and deposit products per relationship;
- Revenue by major loan and deposit product category; and,
- Productivity of relationship managers measured in terms of assigned portfolio, deposit and credit origination activity and fees.
The universe of metrics could be expanded over time. These simple metrics would begin to establish an objective, factual basis upon which executives could gauge the performance of their commercial business.
Mr. Hanley is a partner with Washington, D.C.-based Capital Performance Group, LLC. He can be reached at [email protected].