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So you wanna grow loans? Then do the work!

Posted September 08, 2016 by Kevin McNamara

The bank's vaults are open for any and everyone. Money is there for the taking; all you have to do is ask!!!

bank lendingSounds a bit on the crazy side that banks will loan money to anybody, doesn't it? But how could the educated economist or banker, for that matter, say anything different when many banks are reporting double-digit loan growth in their second quarter earnings reports? Yet, the U.S. GDP has not grown at a pace greater than 1.2 percent in the last three quarters, and it has not exceeded 2.6 percent in the last six quarters.

It is a case of 2 + 2 = 5.  Things just do not add up.

Take a chance or miss earnings expectations?

What really doesn't add up is earnings expectations in the face of these kinds of GDP numbers at a time when the only real way a bank can increase earnings is through asset growth. And remember, just a year ago, all we heard about was how banks were preparing their balance sheets for the ensuing rate increases in Q4 of 2015 and throughout 2016. Those rate increases sure would have helped their margins, but the economy just did not grow as expected, and the rate hikes didn’t come to fruition. So, who can blame the Fed for holding the line on interest rates with GDP numbers like these?

As a result, banks’ financials aren’t where they need to be, so they need to make some fast money. What is a bank to do? Close the lending vault and miss earnings? Well that idea is not going to be popular with most bank CEOs and investors.

A Faustian bargain

The banks’ solution? Management is cracking the whip to drive more loans despite the thinner margins. And many banks are reaching further down the credit curve than they would like, taking on riskier loans since they can bring in higher interest rates. (A recent article in American Banker underscores the potential hazards of this lending environment.) Additionally, banks are investing in higher-risk securities since those will bring in better returns. Desperate times call for desperate measures.

But this is a dangerous and short-sighted solution. I believe this is the time for senior management at banks to step up and not follow the rabbit down the hole as we all did in 2006-08. The better answer might be a blend from the top of the house down to the front lines.

  • At the top: Fight unrealistic earnings expectations when the only way to achieve those earnings is by growing assets (some of which are risky) in uncertain times.
  • On the front lines:Challenge your lending units to do what my son's basketball coach preaches -- "DO THE WORK!!"

Doing the work

Yes, to get the “good loans”–the ones that are most-desirable and lowest-risk–bankers have to do the hard work, such as:

Improve pre-call planning. For example, review the LinkedIn profiles for leaders of your prospect companies. Then use the information found on Vertical IQ to show you are up to speed on your prospect’s industry.

Run the numbers. Don’t skimp on the time you commit to financial analysis. For example, be sure you consider the prospect’s sensitivity to a slower and shakier economy.

Sharpen up on prospecting efforts. Make more and better calls…you are going to need a lot of pipeline volume to make your goals this quarter and this year. Consider doing a prospecting campaign by sending timely, relevant articles to a group of companies within a certain industry.

It’s a time for action

Now is a time when bankers must grow their pipelines through aggressive calling strategies. They can't sit back and try to close 100 percent of their pipelines by winning with lower rates and aggressive structures. They need more prospects–more looks–because they are going to have to pass on some "opportunities."

Bankers who want to hit their numbers must be more diligent with their pre-call planning and research. They have to work smarter and harder to understand how prospects’ firms operate and which risks to watch out for. Bankers must understand industry trends. And finally, they are going to have to offer banking solutions that address working capital and capital financing challenges. As we all were told in our younger days: It is easy to follow the crowd. In this competitive lending environment, bankers have to learn to be different and DO THE WORK in order to lead the pack!!

Tags: bank lending, bankers, Call planning, call preparation, economy, Industry research

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