AUTHORKirk Saari, Partner

POINT OF VIEW FEBRUARY 2012

Financial Services

COMMERCIAL BANKING COMPETING FOR GROWTH IN 2012

Amidst the turmoil in global markets, North American banks are generally flush with deposit

funding and are well-capitalized. Earnings growth prospects however, while improving,

remain weak, primarily due to scarcity of earning assets:

• Consumers continue to de-lever with no further tailwind from continued interest rate

decreases possible

• New mortgages are funded almost completely off bank balance sheets

• Commercial borrowing demand has been low although is showing signs of life

• Many companies have substituted traditional bank debt with fixed income financing

In the face of these headwinds, banks are left with continued reserve releases, cost-cutting,

and the eventual hope that deposit margins will rise, when and if rates rise, as sources of

earnings growth.

Despite the apparent gloom, we see the commercial banking sector, excluding commercial

real estate, as a bright spot. Credit loss volatility is low relative to other sectors, through-the-

cycle returns are acceptable relative to alternatives, loan demand tends to rebound quickly

in economic recoveries, and it is a local business with low concentration – meaning regional

competitors can compete successfully with national banks.

Winning in this segment is the challenge. There are too many institutions with too-

similar strategies in a market that is not growing quickly enough. A critical factor that will

differentiate winners is the extent to which they invest in capabilities across a number

of dimensions: sales and marketing, product management, delivery and servicing, and

operational efficiency.

WINNING THE BATTLE FOR GROWTH IN COMMERCIAL BANKING

Having high-performing relationship managers (RMs), whether through natural selection

or training, is the single most important driver of performance in commercial banking.

Unfortunately, every competitor knows this. Now commercial banking executives are

looking to change the way their businesses have run in the past. Slow market growth puts a

premium on out-executing competitors beyond just RM acquisition – across a broad set of

capabilities, as outlined in the following table.

“Commercial banking is the only business that is done

the same way today as it was done 100 years ago.”

– Anonymous bank CEO

Copyright © 2012 Oliver Wyman 2

COMMERCIAL BANKING CAPABILITIES CHECKLIST

CAPABILITIES FOCUS AREAS

Sales and marketing 3 Sales force organizational design

3 Sales force effectiveness: measurement, rewards, hiring, firing, training

3 Client segmentation, profitability measurement, and prioritization

3 Market analysis and market selection (competitive dynamic, sizing, growth, inherent profitability)

3 Knowledge sharing (industry knowledge, sample deals)

3 Post mortem sales reporting

Product management 3 New product development and upgrade path

3 Competitor intelligence

3 Product wallet measurement

3 Pricing management (fee waiver management, market-based pricing, risk-based pricing)

3 Target portfolio definition (industry mix, risk parameters)

Delivery and servicing 3 Treasury management implementation

3 Channel management

3 Policy design

3 Delivery and service consistency

3 Ability to support customers with increasingly complex businesses (foreign exposure transactions, more

complex payment needs, etc).

Operational efficiency 3 Credit process design (process automation, differentiation, streamlining, role interaction)

3 Efficiency benchmarking and optimization

To what extent do these capabilities matter? Very significantly, based on our comparison of two banks’ commercial

banking businesses. One bank, Bank A, was weak on most of these capabilities. Conversely, Bank B ranked well on

many of them. We controlled for their client mixes in our analysis to make the client sets as comparable as possible,

and we then contrasted the banks on their average revenues per client controlling for client size.

Copyright © 2012 Oliver Wyman 3

AVERAGE REVENUE PER CLIENT: A COMPARISON OF TWO BANKS

$500 MM-$2 BN$200-$500 MM$50-$200 MM$20-$50 MM<$20 MM 2 BN+

Bank B

Bank A

Bank A generates ~80% as much revenue per client as Bank B

Bank A generates ~40% as much revenue per client as Bank B

REVENUE SIZE OF CLIENT

As the exhibit above shows, Bank A’s per client average revenues were below Bank B across all client size segments.

The shortfall was only 20% on average for commercial banking clients below $200 MM in revenue size. This shortfall

ballooned to about 60% for larger middle market/mid corporate clients over this threshold.

Why did Bank B perform better than Bank A across the client-size spectrum? The reasons were several fold:

CAPABILITY BANK A BANK B

Customer information • Client-level information limited to revenue without

product-level drill-down capability or balance sheet usage

• Fully 1/3rd of the client base lacked information

• Near 100% coverage of clients in a full customer

profitability data set including product level hierarchies

with information on risk, balance sheet, revenues,

and costs

• Included high-quality segmentation data about

company size, history, and industry

• Prioritization through wallet sizing estimation

RM coverage model • Undifferentiated against client size

• High account loads regardless of client complexity

leading to low wallet share

• Haphazard linkages between RMs and product

specialists with little coordination on account planning

• RMs working with $500 MM clients were different

individuals with different training than those working

with $25 MM clients

• Dedicated larger account RMs had account loads of

~25 leaving significant time to plan accounts in a joint

RM/product group process

Credit product management

• No credit product management capabilities and

consequently, little visibility into balance sheet

allocation and positioning for cross-sell returns

• Has a credit product management function responsible

for how the balance sheet was being used to generate

credit and non-credit returns – including cross-sell,

pricing optimization, and segment strategy

Measurement and motivation

• RM-level revenue targets with no distinction among

sources of revenue and no transparency in target setting

• Based on value metrics that differentiate sources of

income based on value to bank

Copyright © 2012 Oliver Wyman 4

WHY CAPABILITIES MATTER

These capabilities can help drive performance significantly because commercial banking profit drivers tend to be

very skewed in the typical bank: less than 20% of the activity drives more than 80% of the results. Consider the

following skews, all driven by actual bank experience:

RM TIME ALLOCATION: TIME ALLOCATION BY RM DECILE

40%

50%

70%

60%

10%

20%

30%

80%

1 2 3 4 5 6 7 8 9 10

RELATIONSHIP MANAGER DECILE (1 = TOP PERFORMING DECILE)

Internal marketing support activities

Watchlist/workout

External marketing

Maintenance

0

100%

PRICING RELATIVE TO MARKET: QUARTER-ON-QUARTER PRICING RELATIVE TO MARKET (0 REPRESENTS MARKET AVERAGE)

0

400

200

-200

Q4 PRICING

-400

600

Q3 PRICING

200 400 6000-200-400

RM PRODUCTIVITY: REVENUE PER RM

8

7

6

5

3

4

2

1

0

$MM

RM PERFORMANCE RANKING

HIGHEST LOWEST

Copyright © 2012 Oliver Wyman 5

As these charts show, top RMs can be many times better than bottom RMs in overall

performance. As the RM time allocation and productivity charts suggest, the best RMs use 10-

20% more of their time towards marketing, which correlates to 10-20% greater revenue per RM

in those top deciles relative to the average – without a material change in costs. As the pricing

chart further shows, some RMs are simply better than others at pricing (in this case, for loans).

One could see similar skews in wallet penetration, fee revenue per credit dollar, alignment of costs

with client value, and many others. The value of even slightly reducing these skews, making

the bottom performers look more like the middle performers, is significant as the following

real-world examples we have witnessed illustrate:

• One organization brought greater pricing discipline driving lending revenues up

10bps – the reason some RMs were serially bad pricers was that they had no idea what

good pricing looked like – through the introduction of some basic tools and reports,

they addressed this issue

• Another uptiered their customer profitability measurement capabilities. This revealed

that smaller commercial clients were significantly more profitable than conventional

wisdom held, leading to a segment strategy change

• Another found that they were missing capital markets opportunities in some segments due

to lack of sales force training in this area – changes to the coverage model and RM training

drove capital markets revenues from 3% of the overall business line to 6% over three years

Realizing these improvements takes four steps: 1) establishing an internal framework

and nomenclature around capabilities, 2) constantly evaluating themselves against the

capabilities catalogue, 3) investing in closing the gaps, 4) tracking the success over time.

Many banks have not invested in their commercial banking capabilities in recent years.

We believe the winners in this sector will be those with the best capabilities. Our recent global

survey of commercial banking capabilities indicates that most banks have strengths and

weaknesses which implies that capability-building should be on everyone’s agenda for 2012.

Like Einstein’s famous observation about 1% inspiration and 99% perspiration, the sweat

equity developed from capability building should provide attractive returns. Hopefully,

this paper supplies inspiration to motivate a diagnostic review of capabilities and any

necessary upgrades in this opportunity-rich sector.

Copyright © 2012 Oliver Wyman 6

ABOUT THE AUTHOR

Kirk Saari is a Partner in the Americas Corporate & Institutional Banking Practice.

www.oliverwyman.com

Oliver Wyman is a global leader in management consulting that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, organizational transformation, and leadership development.

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