Pub. 1 2013 Issue 2

spring 2013 19 be done smartly giving consideration to the regulatory capital necessary to support that growth. With Basel III’s emphasis on common equity and higher risk weightings for certain asset classes, capital will become increasingly more expensive and it will be more challeng- ing to achieve historical returns on equity. Capital planning will need to occur alongside strategic planning, with an increased emphasis on the impact of strategies on risk-adjusted capital levels. Core deposits, a vital component in operating revenue growth, provide not only a low cost source for funding asset growth but an opportunity to provide valuable non-interest revenue growth. While most banks are flush with core deposits today, it is critical that there is a heightened focus on expanding those relationships and creating stickiness. There will come a time when rates will rise and certain bank deposits will begin to flow back into higher-yielding investments. Diversified Operating Revenue Growth Future success for most banks will be dependent upon the ability to grow assets profitably. A key element of sus- tainable earnings is operating revenue growth. Sustainable operating revenue growth, the lifeblood for a healthy, thriving business, will differentiate those banks that will thrive from those that will struggle and eventually disap- pear. What should your bank be doing to grow operating revenue as a percent- age of assets? 1. Understand how you make your money. It’s critical. While we are the financial industry, so few banks know where they make and lose money today. Most banks do not have profit- ability systems and models in place that show relative profitability of products, relationships, business lines and line officers. This information is critical in making precise decisions on product design and pricing, target mar- keting strategies and, generally, where to allocate and invest your precious, unlimited resources and capital. Also, what are your bank’s key sources of interest-related and non-interest related revenue and what has been their trend? 2. Acknowledge that there is much unrealized value in your current cus- tomer relationships. You should ask yourself, “Have we fully monetized our current business and consumer cus- tomer relationships?” With an inflow of core deposits and new relationships the past several years, this is the time to focus sales strategies on expanding those relationships. A “no” on any of these pinpoints a deficiency that could be holding you back in realizing operating revenue potential. Below are questions you should ask yourself and your senior team: Customers: Do you know who are your target businesses and consumer customers? Do you know what that target customer segment values (prod- ucts, service, and delivery channels?) If you know what your target cus- tomer values, does your bank provide these products, services and delivery channels? If not, why? Have you considered alternatives to building that capability internally such as outsourc- ing, joint venturing, or partnering with a provider that does? We have found this deficiency is particularly acute with regard to business custom- ers— knowing what they value and providing a proposition or offering that is attractive to the customer. Sales Strategies: Does your bank’s culture of consultative sales extend to your self-service / electronic delivery channels? Sales strategies are no longer just about face- to-face interaction. In that light, do you have sales strate- gies to attract new customers and grow existing relationship through your call center, ATMs, website, and mobile channels ? As customers migrate from your branches to self- service channels this becomes critical in cross-selling products and services specifically targeted to the customer at the point of log in. These self- service channels are the new battleground for attract- ing, retaining and growing customer relationships. The friendly, responsive, easy-to-do-business philosophy that created success in your branches must also be replicated across your self- service channels. Business intelligence and tools: Does your bank provide the tools (processes, technology, and infrastructure) and actionable customer intelligence for employees to identify, understand and seek opportunities to grow customer relationships profitably? While your employees may be anxious to grow and expand customer relationships, without the necessary tools or action- able customer intelligence they will not be effective and efficient in recognizing opportunities. Does your bank know and understand the “value” of each household and business? Another critical element of customer intelligence, understanding the value of customer relationships individually and by customer segment, allows you to be more focused and precise in harvesting your most profit- able relationships. While this sounds foundational to running a business, most banks do not know this valuable information about their customers. 3. Make certain your pricing schemes for loans, deposits and other services consider both risk and relationship. Are you evaluating pricing and product design in light of changes in customer behavior patterns and regulations? It is essential underwriting analytics to consider both risk and relationship. Ba- sel III’s changes in risk weightings for certain asset classes and thus the need for more capital for riskier asset classes will require price adjustment for those asset classes requiring more capital. Increasingly banks are requiring the deposit relationship as a condition to providing a loan and such bundling is reflected in pricing.  Change — continued on page 20