Equity analysis firm Bernstein Research published a report on Monday, May 19th, that highlighted the five disruptive trends in banking discussed at a conference they hosted last week.
This overview of the disruptive trends in banking is taken from a panel discussion with the team at First Manhattan Consulting Group, including President JimMcCormick, Pete Gilchrist (Risk Management), Andrew Frisbie (Deposit Analytics), Kris Lazzaretti (Marketing Services), Jonathan “Wes” West and Gary Wang.
Disruptive trends in banking: Marketing analytics/Big Data will disrupt relative loan growth
Marketing of loans has become much more sophisticated over the last couple of years.It’s no longer just a matter of having a good marketing campaign to attract attention and skilled bankers/salespeople to close the loans, today it’s about targeting specific loan products to specific demographics. This means analyzing Big Data to identify your targeted marketing groups.
“FMCG believes that while having skilled bankers is important, banks that are winners in growing their consumer and commercial loan portfolios are increasingly turning to comprehensive data libraries and advanced analytics. Advanced segmentation, an early use of such data and analytics, was a loan growth windfall for the best practitioners like Signature Bank (NASDAQ:SBNY), City National Corp (NYSE:CYN), PNC Financial Services Group Inc (NYSE:PNC), and GE Capital. Segmentation continues to be an effective approach, according to Mr. Lazzaretti, but “big data” now allows analytics to be even more granular and actionable.”
Today banks don’t just want clients, they want profitable clients. Banks with top-notch Big Data analytics can identify more attractive future relationships. The FMCG analysts pointed out that tactical questions, which previously could be answered only through direct interaction between banker and client, now can be answered through analytics. These important questions include who is borrowing and how can banks optimize client relationships (ie, make money off the client).
The need for deposits will disrupt relative growth
The FMCG analysts highlighted three reasons that a growing need for greater deposits at banks will impact growth. First, loan-to-deposit ratios remain depressed, caused by deposit shifts. Loan-to-deposit ratios averaged roughly 90% pre-crisis, but are only at around 80% right now. This drop has been caused by deposit growth, which drubbed loan growth by as much as 250% since the crisis. Second, given historical dynamics, a funding gap will be created as the economy rebounds. Third, deposit discipline will be important. The FMCG analysts argue that banks that are not prepared to grow deposits will have to put the damper on loan growth, cutting into profits.
Disruptive trends in banking: Compliance with Liquidity Coverage Ratio (LCR) will disrupt balance sheet mix
FMCG analysts Gary Wang argues that liquidity is key to bank survival, and points out that most banks that failed during the financial crisis did so because they ran out of liquidity, not capital. Wang also highlights that a great deal of uncertainty still surrounds LCR as banks await the final standards. The panel said that the U.S. LCR rule may not be completely finalized until 3Q14, which will make LCR implementation by January 1, 2015 nearly impossible.
Demand for improved customer experience will disrupt relative consumer deposit growth
The panelists also pointed out that regional banks have lost their edge in customer service over big banks. “In recent years, the big banks have made strides in improving customer experience (FMCG cites JD Power scores), and the results speak for themselves—since 2010, the top-10 banks are growing consumer deposits three times as fast as mid-sized banks and have already reclaimed a third of the lost share from the prior 15 years.”
Disruptive trends in banking: Rising rates and an improving economy set to disrupt relative profitability
Finally, the FMCG analysts highlighted that macro-economic trends are leading to industry level “sea changes” in profitability, which will play out gradually, impacting companies individually. “As the industry undergoes this tidal transformation, FMCG believes an important investment consideration for bank stocks is the extent to which banks’ relative profitability is being disrupted (positively or negatively) by the trends discussed