The story told in the FDIC Quarterly Banking Profile for the first quarter of 2011 has a familiar ring to it. Profits rose for the seventh consecutive quarter – but declines in loan loss provisions continue to drive improvements in earnings at insured institutions of all sizes.
What is truly notable, however, is that operating revenue experienced a year-over-year decline for only the second time in the past 27 years. This decline was driven by decreases in revenues at larger institutions; however, the core issues behind the decline are being faced by institutions of all sizes.
- Issue: Slow growth in earning assets. Total assets at insured institutions increased by only 0.7% during the first quarter. The small amount of growth that did occur was driven by increases in securities or other assets, not loan growth.
Response: Increased commercial lending. The only category of loans to experience any growth during the first quarter was C&I loans. Creditworthy commercial customers continue to be more heavily targeted as consumer loan demand remains at low levels. While this is certainly a sensible response to the situation, there will likely not be enough C&I loan demand to go around. Banks must determine how they will add value to these types of customer relationships beyond the sale of the loan product.
- Issue: Declining fee income. Noninterest income decreased at almost half of insured institutions. This was driven by declines in trading income, in addition to declines in deposit service charge income.
Response: Plug leaks & add services. While greater focus on business lending may serve as the quick fix to slow loan growth, many institutions have yet to find a similar bandage to staunch the flow of fee income. In the short-term, the answer may lie in keeping a tighter eye on practices that may have been less scrutinized in the past. For example, what is your bank’s fee waiver rate today? If you decreased that by 2%, how much revenue could you keep in the bank?
Commercial customers could also present a solution to this problem – your bank likely offers cash management, wealth management, insurance, and other fee-based services, but how much emphasis is really placed on cross-selling those services today? Changed incentives, product packaging, and other initiatives to deepen customer relationships may be just as important to the bottom line as loan production.
In sum, first quarter earnings results indicate that operating revenue is harder to find. Bankers will need to get more creative and seek out new niches and specialties if they wish to read a new tale in the next Quarterly Banking Profile. We recently interviewed four extreme niche players for the ABA Banking Journal whose strategies may help to spark ideas that can be applied at your own institution. Have any other ideas or comments? Click here to send us an email.