Unlocking the potential of commercial banking

RMA Journal, The,  April, 2003  by John Walenta

• E-mail
• Print
• Link

Figure 1

Business Model Spectrum for the Commercial Segment

                            Super-Community
  Credit Led                Traditional Banking

* Loan spread and loan    * Distributed
  fees account for over     front-office
  80% of revenue.           coverage model.

* By definition,          * High touch/convenience
  limited product suite.    value proposition.

* Credit advanced in      * Consolidated back-office
  form of simple            support spanning routing
  secured bank debt.        and complex functions.

* Pricing often used      * Comparatively
  as a competitive          low overhead.
  differentiator.
                          * Basic product set with
* Deal flow for upper       concentration in cash
  end of market largely     management,
  from participations.      treasury services.

* RAROC Range: Low
  single digits - 14%



                          * RAROC Range: 15-20+%


                            Super-Regional
  Credit Led                Multi-Product Banking

* Loan spread and loan    * Combination of
  fees account for over     distributed front-office
  80% of revenue.           and national/regional
                            accounts coverage.
* By definition,
  limited product suite.  * Frequent separation
                            of sales and
* Credit advanced in        service (including
  form of simple            account management).
  secured bank debt.
                          * Consolidated
* Pricing often used        back-office support
  as a competitive          spanning routine
  differentiator.           and complex
                            functions.
* Deal flow for upper
  end of market largely   * Very broad
  from participations.      product set, including
                            capital markets and
* RAROC Range: Low          unique offer-
  single digits - 14%       ings (i.e., insurence,
                            business processing,
                            wealth management).

                          * RAROC Range: 15-25%


                            Asset Based/
  Credit Led                Leasing

* Loan spread and loan    * Numerous models
  fees account for over     with common focus
  80% of revenue.           on higher-leveraged,
                            story credits.
* By definition,
  limited product suite.  * Core offering of
                            margined operating
* Credit advanced in        lines, often with
  form of simple            secured term debt.
  secured bank debt.
                          * Characterized by
* Pricing often used        intensive account
  as a competitive          monitoring,
  differentiator.           regular field audits.

* Deal flow for upper     * Deep knowledge
  end of market largely     of residual values
  from participations.      and liquidation process.

* RAROC Range: Low        * Typically extract higher
  single digits - 14%       stand-alone pricing
                            for structured
                            deals.

                          * RAROC Range: 15-20%
                            (without expanded offerings)

                            Structured
  Credit Led                Credit

* Loan spread and loan    * Focus on structured
  fees account for over     deals, primarily with
  80% of revenue.           middle-market names
                            (>200MM in revenue).
* By definition,
  limited product suite.  * Senior secured
                            debt in combination
* Credit advanced in        with mezzanine,
  form of simple            subdebt, and strips
  secured bank debt.        of private equity.

* Pricing often used      * Low account loads
  as a competitive          and average
  differentiator.           deal flow.

* Deal flow for upper     * Premium on industry
  end of market largely     knowledge, but
  from participations.      structuring
                            ability is key
* RAROC Range: Low          attribute.
  single digits - 14%



                          * RAROC Range: 15-30+%

Figure 2

Sources of Commercial Business Profit Life--Client Example

                                                             Potential
                                                           Risk-Adjusted
                                                           Annual Profit
                                                           BPS of Assets

Business Development/  [right arrow]  Cross-sell gains        5-15 bps
RM Productivity                       Market share gains

Revenue Capture        [right arrow]  Pricing                 5-10 bps
--Lending                             Revenue leakage
--Adjacent products

Costs                  [right arrow]  Credit process,        10-20 bps
                                      administration, and
                                      operations
                                      Other efficiencies     15-25 bps
                                      and right-sizing

Net Contribution       [right arrow]  Total pickup            35-70bps

Figure 3

Select Best Practice Ideas and Tactics

Idea                           Actions

Joint ventures with          * Full-service regional aligns with
asset-based lenders,           specialized lenders for select
factoring companies            credits.
                             * Higher maintenance accounts are
                               migrated to new joint venture.
                             * Originating bank retains finder
                               fees and shares in net profits.

Centralized financial        * Customers submit quarterly
reporting clearinghouse        financials online for faster
                               compliance checks, monitoring

Small business banking       * Customers with simple, straight-
factory                        forward banking needs are
                               migrated to low-touch coverage
                               model.
                             * Account reps handle several
                               hundred accounts under optimized
                               platform.
                             * Simple cross-sell initiated.

Upper-middle-market          * Centralize accounts with growing
investment bank                middle-market companies.
                             * Form SWAT teams to identify and
                               market derivatives, equity, M&A
                               opportunities


Industry specialists in      * Divides credit but not coverage
credit                         by major industry sectors.
                             * Establishes Web-based industry
                               views and parameters for field-
                               based RMs to consult.
                             * In select instances, creates
                               dedicated credit committee for
                               industries where the bank had a
                               major exposure.


Account migration analysis   * Systematic assessment of why
                               accounts are lost or leave the
                               bank.
                             * Centralize follow-up that does
                               not involve RM.
                             * Compare lost accounts against
                               bank's relationship ROROC model.
                             * Information discussed quarterly
                               across bank and with relevant
                               RMs/banking teams.

CMBS issues and preparation  * Package and sell homogeneous
for midle-market CLOs          credits.

Market-to-market pricing     * Require new originations and
                               renewals to be priced at average
                               of first quartile pricing
                               prevailing for that risk-rating
                             * Gap between first and last
                               quartile monitored centrally.
                             * Removes considerable pricing
                               discretion that RMs and line had
                               in past with a rational and
                               supportable approach.

Idea                           Benefits

Joint ventures with          * Labor-intensive accounts are
asset-based lenders,           moved into business models better
factoring companies            equipped to handle them.
                             * RMs are freed to focus on core
                               clients
                             * Costs are taken out.


Centralized financial        * Paperwork and attendant cost is
reporting clearinghouse        reduced.
                             * Easier to monitor delinquencies.

Small business banking       * Greater leverage of RM time for
factory                        remaining high-touch accounts.
                             * Simpler accounts handled by less
                               expensive account reps.





Upper-middle-market          * Better prioritization of emerging
investment bank                capital markets, treasury opport-
                               unities.
                             * Eliminates lack-of-attention to
                               problem from corporate product
                               specialists.

Industry specialists in      * Provides a single, comprehensive
credit                         view of risk tolerances by
                               industry.
                             * Addresses RM critical mass issue
                               by providing easy-to-use Web-
                               based house view.
                             * Preserves local RM presence,
                               which was still considered more
                               critical than having centralized
                               industry coverage.

Account migration analysis   * Provides objective data on why
                               the bank may have lost customers.
                             * Revealed that around half the
                               accounts lost were SVA-negative
                               but that some desirable names
                               were also lost.
                             * Tailor action plans to prevent
                               migration over structure and
                               pricing issues.


CMBS issues and preparation  * Increase balance sheet velocity.
for midle-market CLOs        * Collect servicing fees.

Market-to-market pricing     * Simple and elegant way to improve
                               overall loan pricing at customer
                               level.
                             * Commonsense standard that can be
                               used to help persuade customers
                               of pricing increases.
                             * Especially beneficial for
                               repricing existing clients at
                               better level.