How stable are your deposits?

I am attending the Financial Managers' Society (FMS) Forum in Las Vegas this week. The Forum is chock full of education opportunities for banking finance professionals. One session caught my attention. The tandem speakers taught the audience about going "long", or at least longer, in their investment portfolio and minimizing risk.

One of the underlying assumptions in advising to "go long" was that core deposits were as stable today as they were four years ago. I challenge that thinking. Average balances per account among most core deposit categories have been growing and I think customers are parking their money waiting for greener pastures. When they arrive, what will they do with that money? I put this question to Dallas Wells, an asset-liability specialist from Asset Management Group in Kansas City. I have followed Dallas' writings on his informative blog for a while now and caught up with him at the Forum. Here is what he had to say.

What do you think will happen to core deposits once rates rise?

~ Jeff

Data Driven Strategy

You recently read an excellent book on strategy. Your financial institution faces challenges... economy is crawling at road-kill pace, customers struggling to remain current on loans, regulators breathing hot and heavy down your neck. You need to assemble the team, assess your situation, chart your course.

So you schedule a strategic planning retreat. Your strategy team wonders how they should prepare. Or will this be a brainstorming session?  Although so many decisions are made "from the gut", I put to you that your strategic direction should not be one of them. But so often I see strategic decision makers enter the fray with little more than their past experience and a truckload of anecdotes as their guide. This, to me, is like bringing a knife to a gunfight.

Here is the data I think every strategy team member should have when making strategic decisions:

1. Industry trends and statistics

2. Competitive trends, statistics, relevant data

3. Market trends and statistics

4. Customer analysis

5. Emerging customer preference analysis

6. Your FI performance data, trends, and analysis

7. Brand position analysis

So often strategic leaders assume their bank occupies a superior position based on nothing more than a customer comment heard during the past year. But does the FI truly have a superior position and if so, should the strength be exploited as a competitive advantage within the strategy? This requires discipline because there is a lot of data out there. I once proposed a banker education session titled "Big Data: Big Advantage or Big BS" (Note: I did not use the acronym BS). Cheeky subject line. It didn't get selected. But the point here is to use data that is reliable, relevant, and not BS.

Regarding how data influences strategic decisions, I once had a CEO tell me that when rates rise, his closest competitor will have to lead the market in deposit rates because of that bank's interest rate risk and liquidity positions. That is an important piece of strategic information he knew about the competition because he researched the competition. Positioning yourself for such an eventuality helps increase the liklihood you will successfully execute strategy.

As Sun Tzu said over 2,000 years ago in The Art of War, "he who knows the enemy and himself will never in a hundred battles be at risk".  How well do you know the competition, your customers, your markets, and yourself?

What other information should strategic decision makers bring to the strategic planning retreat?

~ Jeff

Grow or Die. Really?

Grow or die. Acquire or be acquired. Build it or kill it. And so go the banking platitudes. Now, perhaps those that invoke these phrases have strategies that compel them to grow. Shareholder value, so the logic goes, is created if I grow my balance sheet 10% per year and my earnings, because I'm realizing economies of scale, grow faster.

But what if you adopt the strategy of the tortoise? Go slow. Be methodical. Right size your cost structure as you go. Prune the tree frequently. Or what if the markets where you exist can't support 10%+ growth? You are pushing the proverbial rock up hill expecting your employees to beat a plodding market, year in, year out.

Calamity say the consultants, the investment bankers, the rock star banks. You must grow or die! In this environment, how could you possibly face the industry headwinds without doubling your size?

But wait a minute. If we are a public financial institution, what do our shareholders expect? Would a 10% total return be sufficient? It certainly is greater than our industry has been delivering, regardless of the size. In fact, as a disgruntled Citi shareholder, I put to you that their size worked against them. The risk on their balance sheet was (is) incomprehensible, even to them. I bought in at $50, which is now the equivalent of $500 due to a reverse stock split so they can increase their embarrassingly low share price. Today they trade at $25. Their clarion call should have been grow AND die.

What if, in the board room of a community financial institution, your strategy team decided to go slowly? What would your shareholders say to 5% earnings growth that translated to 5% stock price appreciation? Not too sexy. But what if your strong profitability allowed you to pay a 5% dividend yield. Now we have a 10% total return to shareholders delivered by a steady hand. Such was the strategy of City Holding Company, a $2.8 billion West Virginia bank. Its 10-year growth rates, represented in the accompanying table, doesn't exactly wow analysts.

But look at their 10-year total return to shareholders compared to the industry. Slow growth, combined with a 50%+ dividend payout ratio resulting in a 4.5% dividend yield delivered impressive returns. Compared to the rest of our industry, off the chart returns.

How do those that sound the growth siren square City Holding Company, and the many slow growth, highly profitable financial institutions like them?

I would like to hear from you.

~ Jeff


Note: I make no investment recommendations in my blog. Please do not claim to invest in any security based on what you read here. You should make your own decisions in that regard. FINRA makes people take a test to ensure they know what they are doing before recommending securities. I'm sure that strategy works out. You read that I invested in Citi, right?