The 4th of July is upon us so why not hold
an ol' fashion picnic and fireworks
celebration? Food poisoning and salmonella
are a couple reasons, not to mention the
threat of fire, arrest for the illegal fireworks
and stares from your "green" neighbors
when you spew more smoke than Union
Carbide. Regardless of how you are going to
celebrate it you have to admit that the 4th of
July has changed over the past 10Ys.
If we look forward, there is no telling what the 4th of July will
bring. For banking, however, we have a clearer picture. 10Ys
from now, banking too will be a different place: 23% percent of
our readers will be retired, 20% will not be working in banking,
and 7% will be running a new bank. There will be 17% fewer
banks and 30% fewer branches. Those banks and branches that
do exist will be smaller. Credit margins will be skinnier, driven
down by greater competition from financial institutions and
customers that are more transient and interest rate sensitive.
Operating expenses will be reduced slightly, due to greater use
of credit scoring, electronic loan processing, imaging and more
efficient core banking. Net interest margins will be slimmer,
however, fee income will be higher. While operating margins will
be smaller, banks will have a better handle on risk and produce a
greater return on risk adjusted capital.
The important question is where will your bank be in 2018? One
of the best management exercises is to develop a 10Y plan (not
just a 5-year) and work backwards about what it means in terms
of capital, employees, distribution channels, products, footprint,
competitive position and key strategic priorities. Can your bank
make it on its existing product set? In what areas should those
new products and services be developed? How many branches
do you need and where? Decisions on staffing, corporate
organization (stay private or go public?) and new business lines
can be implied by a bank's future goals.
One needn't be a futurist to come up with answers to the
questions about how the bank will look in terms of assets, capital
and earnings. In fact, if you think your bank will look the same,
only bigger in 10Ys, chances are you're missing something and
not being innovative enough. The goal of this exercise is to not
name exact products, but to identify areas of growth. The
exercise of 10Y planning starts with crafting a set of goals (asset
size, geography, branch network, etc.) and then rank their
relative importance. Is market share more important than growth?
What about the trade-off between growth and earnings? Once
targets are identified, the team can then work backwards to
identify 7, 5, 2 and 1Y goals.
While 5Y plans are common, the time frame is too short for
many managers, as it usually takes 3-5Ys for a new product to
be rolled out and accepted. Further, most managers can almost
taste 5Y targets, whereas 10Y goals allow for greater vision and
bigger dreams. The current trend of producing a 10Y plan
dovetails nicely to the latest trend in asset-liability management -
producing "going concern value." Traditionally, banks have
looked at the ALM position of their current balance sheet, without
asking the question of what is the risk, once current assets and
liabilities mature. In other words, going concern value treats a
bank not as a portfolio of assets and liabilities, but rather one of a
series of growing earnings and risk streams.
Focusing 10Ys into the future highlights what bank managers
can do today (in terms of business direction, infrastructure and
brand) to ensure adequate shareholder return in the future. They
say that a journey of 1,000 miles starts with a single step. That
said, it is always helpful to know where you are going first.
On our nation's 232rd birthday, we are thankful that we have
the freedom to plan 10Ys into the future and char our hotdogs as
black as we want them. Have a happy 4th and good luck with the
grill.