Survival of the Fittest: Is Your Bank Positioned to Survive?

Success for most banks is dependent upon the ability to grow assets profitably.  A key element of sustainable profitability is operating revenue growth, yet for most commercial banks there is a disturbing trend of continued declines in operating revenue as a percentage of average assets.


We predicted as early as 2010 that the industry’s operating revenue trends would continue to deteriorate.  Alarmingly, operating revenue trends for commercial banks continue to decline. Three quarters of commercial banks’ operating revenue as a percentage of average assets is lower today than in pre-recession 2006 and lower than in 1999, the peak year for pre-tax operating income[1] as a percentage of average assets.

The decline in operating revenue reflects declines in both net interest income and noninterest income as a percentage of average assets.  Our industry has been aware of net interest income pressures for well over 15 years.  To counter act diminished profitability from net interest income pressures, banks have focused on managing overhead expenses. However, like swimming against the tide, there has been no sustainable ground gained in banks’ efficiency ratio (the overhead cost to generate one dollar of operating revenue) because expenses have not declined as much as revenues.  Sustained underutilization of capacity can be quite expensive.  As a result, pre-tax operating income as percentage of average assets1 peaked more than a decade ago.

Add to these pressures on operating income new legislation and regulations that will inhibit key sources of fee income, higher costs associated with increased regulations and new technology and delivery, and required higher levels of regulatory capital and a very challenging future emerges.

Most bankers will say that these last five recessionary years have been extremely challenging.  I believe the next five to ten years will be as challenging or more so.  With low economic growth, lack of robust business investment in expansion and continued low interest rates, all banks will be fighting for meaningful earning asset growth to achieve targeted rates of return for their shareholders.

Charles Darwin, the English naturalist, said it best: “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”  In order to thrive (not just survive) in this highly competitive environment most banks must reevaluate their business models and realign them to meet the challenges ahead.   Those that can adapt their business models quickly will move ahead of the pack and thrive in this challenging environment.

Untitled-18As you create your strategic plan for the next few years, thoughtful consideration should be given to whether your business model is optimally aligned to create sustainable, profitable growth.  For the well-positioned, adaptable bank, there is a navigable path to sustainable profitable growth.  It will, however, necessitate focus, discipline and precision in execution.

What is this navigable path?  Experience and insights gained in working with scores of banks over the last two decades coupled with rigorous analysis of best practice strategies informs our perspective on successful business strategies.  Over the coming weeks, I will outline strategies your bank should consider for creating sustainable, profitable growth.  Primary themes will include smart earning asset growth funded by core deposits, diversified operating revenue growth, relentless focus on right-sizing operational efficiency and productivity, capital management strategies, and prudent risk management.

[1] Pre-tax operating income is calculated as gross income before securities gains and losses, extraordinary items and income taxes.

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