Chairman – About That Ratio

March 31, 2015

How the Math Works for Non-Financial Service Companies

As you probably deduced from the picture above, I’m in Chicago for Bank Director’s annual Chairman & CEO Peer Exchange. While the conversations between peers took place behind closed doors, we teed things up with various presentations. An early one — focused on FinTech — inspired today’s post and this specific question: as a bank executive, what do you get when you add these three variables:

Stricter capital requirements (which reduces a bank’s ability to lend) + Increased scrutiny around “high-risk” lending (decreasing the amount of bank financing available) + Increases in consumer product pricing (say goodbye to price-sensitive customers)

The unfortunate answer?

Opportunity; albeit, for non-bank financial services companies to underprice banks and take significant business from traditional players. Nowhere is this more clear then in the lending space. Through alternative financial service providers, borrowers are able to access credit at lower borrowing costs. So who are banks competing with right now? Here is but a short list:

FastPay, who provides specialized credit lines to digital businesses as an advance on receivables.
Kabbage, a company primarily engaged in providing short-term working capital and merchant cash advance.
OnDeck, in business to provide inventory financing, medium-term business loans.
Realty Mogul, a peer-to-peer real estate marketplace for accredited investors to invest in pre-vetted investment properties.
BetterFinance, which provides short-term loans for consumers to pay monthly bills and purchase smartphones.
Lenddo, an online platform that utilizes a borrower’s social network to determine credit-worthiness.
Lendup, a short-term online lender that seeks to help consumers establish credit and avoid the cycle of debt.
Prosper, an online marketplace for borrowers to create and list loans, with retail and institutional investors funding the loans.
SoFi, an online network helping recent graduates refinance student loans through alumni network.

As unregulated competition heats up, bank CEOs and Chairmen continue to seek ways to not just stay relevant but to stand out. Unfortunately, the math isn’t always in their favor, especially when alternative lenders enjoy operating costs far below banks and are not subject to the same reserve requirements as an institution. As we were reminded, consumers and small businesses don’t really care where they borrow money from, as as long as they can borrow the money they want.

Thanks to Halle Benett, Managing Director, Head of Diversified Financials Investment Banking, Keefe, Bruyette & Woods, A Stifel Company for inspiring this post. He joined us yesterday morning at the Four Seasons Chicago and laid out the fundamental shifts in banking that have opened the door for these new competitors. I thought the math he shared with the audience was elegant both in its simplicity — and profound in its potential results. Let me know what you think with a comment below or message via Twitter (@aldominick).

June 27, 2014June 27, 2014

Valuing the Bank

Today’s post is something of a “public service announcement.” As we approach the dog days of summer, a sneak peek at an exclusive event for bank CEOs, CFOs, Chairmen, Presidents and members of the board taking place at the Ritz-Carlton in San Francisco this October.

To learn more about the program, visit BankDirector.com or click here to register.

April 4, 2014April 4, 2014

FI Tip Sheet: First Quarter Favorites

As I come off of a great week in Chicago and Bank Director’s annual Chairman/CEO Peer Exchange, today’s post takes a look back at the first three months of the year. Yes, certain discussions during this time focused on tepid loan growth, higher capital requirements and expense pressures & higher regulatory costs hitting banks today. Nonetheless, many more conversations focused on growth, innovation and “what’s working.” So, to wrap up this week, three points from the past ninety days that inspired me.

Some of Banking’s Best

To kick off the year, I put together a two-part series on some of the top CEOs in our industry. Inspired by my coach and an article entitled the “Best CEOs of 2013” that ran on Yahoo Finance, I reached out to a number of colleagues that work for professional services firms to ask their thoughts on the top CEOs at financial institutions — along with why they hold them in such regard. Part one shared various thoughts on some of the best CEOs in the business today — broken down into three categories: the “biggest banks” with $50Bn+ in assets, those with more than $5Bn but less than $50Bn and finally, those in the $1Bn to $5Bn size range. Part two built on that piece, highlighting three exceptional CEOs that lead publicly traded banks before shifting to the thoughts and opinions of two very talented colleagues.

Eat or Be Eaten

As the President of Bank Director, I’m lucky to lead one of the industry’s biggest (and dare I say best?) M&A conferences: Acquire or Be Acquired. Let me first offer up big time props to my many talented colleagues for everything they did to make this year’s the biggest and best yet! One of the cool new things I did at the Arizona Biltmore this year? Film a 90 second or less video each evening that summarized the day’s salient points. As much as I shared big takeaways in written form on this site (e.g. what if I told you that by December 31, 2018, we’d witness a 25% decline in the number of institutions between $500mm and $1Bn), I’m proud of these two videos from the desert that relayed what caught my eyes and attention on two of the three conference days.

The Innovator’s Dilemma

In my role, I find myself talking with Chairmen and CEOs about their strategic plans. This year, quite a few shared their thoughts for leveraging financial technology to strengthen and/or differentiate their bank. In a piece I shared at the end of February, I cited Clayton Christensen’s “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail.” His book inspired that Friday’s FI Tip Sheet title – and first point. If you’re not familiar with his work, the Harvard professor writes about two types of technologies: sustaining and disruptive. Sustaining technologies are those that improve product performance. As he sees it, these are technologies that most large companies are familiar with; technologies that involve improving a product that has an established role in the market.

Most large companies are adept at turning sustaining technology challenges into achievements. However, large companies have problems dealing with disruptive technologies — an observation that, in my view, does not bode well for many traditionally established banks. While risk is inherent to banks of all sizes, taking chances on emerging technologies continues to challenge many officers and directors… a theme I anticipate covering in greater detail over the next 90 days.

Whether this is your first time or 78th time reading About That Ratio, let me say thank you for doing so. It is a real treat to share, each Friday, three short stories about what I’m hearing, learning and talking about as I travel around the country. Being that I meet with so many interesting people — be it a bank’s CEO, board members or executives at professional services firms and product companies — I find it tremendously rewarding to share anecdotes and insights that might interest others. As always, Aloha Friday!

January 3, 2014January 3, 2014

FI Tip Sheet: A Look Ahead

Taking a run on this beach inspired me to draft a calendar for upcoming About That Ratio posts. Yes, the quiet beauty of this sunrise in Tulum, Mexico sparked an unexpected rush of ideas for sharing observations and insight on this site. Rather than keep those plans quiet, today’s piece provides some context for the coming months activity. As I did last year, I do intend to post a “tip sheet” every Friday morning by 8 AM ET. In addition, I will continue to share my thoughts from the various conferences I attend and participate in (regardless of day or time). That said, I’m open to suggestions about when and how often to present my take on trends and topics impacting financial institutions. Feel free to leave a comment below or DM me on twitter (@aldominick). (1) While on vacation, I read “Cracking the Code: The Winning Ryder Cup Strategy” by Paul Azinger and Dr Ron Braund. In it, the two write that “great challenges open the door for even greater innovation.” While writing a column is, at times, a labor of love, I am eager to build upon my efforts in 2013. I went back through my posts and found my favorite ones reflected on anecdotes picked up while meeting business and banking leaders from all parts of the country. For this reason, I anticipate many of my 2014 pieces being shaped by what I see, hear and learn while out on the road. Fortunately, I am slated to be in Nashville, New York City, Phoenix, Dallas, San Francisco, Los Angeles and Chicago before the weather warms up… and calling D.C. home affords me numerous opportunities to pass along thoughts from inside the beltway.

(2) I write this blog for bankers first, and executives that support banks second. While I’m fortunate to meet with officers and/or directors from financial institutions, I deliberately write for a broader audience. Essentially, anyone that works with or for a financial institution that cares about “the tone at the top.” For this reason, I will continue to share trends, topics and themes from a number of conferences this year. For example, Bank Director’s Acquire or Be Acquired conference at the Arizona Biltmore this month and May’s Growth Conference at the Ritz-Carlton New Orleans. Being that these particular events bring together CEOs, CFOs, Chairmen, board members and key officers from across the country, I doubt I will be at a loss for ideas or inspiration. Its not just our company’s events I’ll check in from. There are a number of programs held throughout the year that provide insight and inspiration to bank executives that I’ll share too.

(3) To keep things fresh and ground in fact, I will share research summaries from various organizations. To get out from the numbers and into the clouds, I am inviting guest authors to write a piece(s) on what they are seeing and thinking about. In addition, I’ll begin reaching out to bank CEOs to ask for their thoughts on various topics like cyber security risk while inviting executives from various professional services firms for their take on matters that range from financial services technologies to valuing a bank to compensation matters. A lot of ground to cover, a lot of fun to be had. Yes, I’m quite excited for this year’s About That Ratio!

Aloha Friday!!

April 8, 2013April 8, 2013

Expectations +/- Capacity

photo (21) — Heading up to 8 at the Four Seasons

The topic of a seller’s expectations and a buyer’s capacity is particularly relevant in light of what Cathy Nash and Jim Wolohan of Citizens Republic Bancorp shared earlier today. Given that our economic environment is challenging, valuations are depressed and size and scale matter now more than ever, we turned our attention to matters like pricing expectations and the overall state of our financial community by welcoming Ben Plotkin, Vice Chairman of Stifel, to the stage.

Noticeably absent from the bank M&A market in 2012 were the “mega-deals” of years past that have often helped stimulate takeover activity. As I wrote about earlier today, the market made a modest rebound last year, with 230 acquisitions of healthy banks totaling $13.6 billion. But while there were only 150 bank deals in 2011—the third lowest volume since 1989—they totaled $17 billion. While low levels of loan growth and continued net interest margin compression continue to challenge banks, there is “good news” according to Ben:

Profitability has improved (*primarily due to credit leverage);
Capital levels are at 70-year highs;
Valuations have improved significantly; and
M&A discussions are elevating.

To this last point, Ben cites capital access (or the lack thereof) as the driver of consolidation. Thanks to recent stock appreciation, potential buyers enjoy an increased capacity to pay meaningful premiums for smaller institutions and still preserve tangible book value. As a result, larger institutions with access to the capital markets will most likely pursue M&A in order to overcome their more organic growth challenges.

On the flip side, smaller institutions, especially those perceived by the investment community as not being able to earn their cost of equity and unable to access the marekets, may consider an “upstream” partnership. In closing, Ben reiterated that asset growth is essential in order to create the revenue necessary to overcome the cost of doing business.

As with Cathy and Jim, our thanks to Ben for sharing his time and thoughts with us this morning.