From Survival to Profitability … The next mega-trend in banking

 Author: Brad Dahlman, bdahlman@profitstars.com

Congratulations!  If you are a banker and reading this article then you have survived the worst economic downturn since the great depression.  You must have been doing some things right during this challenging period.  Most signs now point to the end of the downturn and a return to modest growth and reduced unemployment numbers.   It is time to come out of “the bunker” and move forward.

There have been many mega-trends in the financial services industry over the past 20 years.   In the 1980’s we focused on asset growth.  The 1990’s were focused on cross sell ratio, increasing “share of wallet”. In the early 2000’s the focus was on check imaging, remote & mobile banking and over the past three years we have focused on survival.  As the survival mode ends, we are now entering a new mega-trend centered on profitability; growing the bottom line and building capital.

The recession and regulatory changes have (and will) cause us to re-examine our business model and find ways to increase capital by enhancing profitability.  Now we are presented with an opportunity to re-focus our organizations on generating profit.  These profits are essential to satisfy shareholders and strengthen a weak capital position found within many financial institutions today.

How to create a profitability culture…
There is an old adage that says you can’t achieve improvement without measurement.  If this rings true, profitability measurement would improve profitability! The steps are simple enough:

• Gain a better understanding of our current profitability;
• Set profitability goals;
• Develop strategies to improve profitability; and,
• Monitor profitability results.

By focusing on these things we can create a profitability culture within our organizations and improve profitability results.  Many banks today do this at the “total bank” level, but getting more granular by branch, product and customer is essential in truly understanding the drivers of profitability.

Some community banks today lack the tools to understand and manage profitability.  A study performed by Aite Group illustrates this point.  The vast majority of tier 3 and 4 banks (community banks with less than $5 billion in assets) do not have profitability solutions.  This puts them at a strategic disadvantage from larger institutions that have profitability systems and a much better understanding of profit drivers.Here’s a simple quiz to assist you in determining if your institution is geared up to effectively manage your profitability.  How many of following questions can you answer with a “yes”?

• Do you know which of your customers are most profitable?
• Do you have a tool to model pricing changes?
• Do you segment and manage relationships based on profitability?
• Are officers/branch managers rewarded for improvements in profitability?
• If profitability changes dramatically do you know why?

Empowering your employees with the tools necessary to understand and improve profits will assist in the recapitalization of your institution’s balance sheet, and give you the competitive edge in today’s challenging environment.