Magazine article Journal of Commercial Lending

Banking in Transition: How to Thrive in a Slow-Growth Environment

Magazine article Journal of Commercial Lending

Banking in Transition: How to Thrive in a Slow-Growth Environment

Article excerpt

Experts say that the U.S. economy is recovering at a pace that varies from one region of the country to the next. Even so, many lenders would agree that loan demand is far from robust.

The experiences of my institution, Fleet Financial Group, may be typical: Both our retail and wholesale banks met their targets for new loans in 1992, with 5-7% growth. At the same time, however, our borrowers were prepaying at an accelerated pace. Instead of our usual 12-15% annual prepayments, we were seeing rates of 20-25%. In other words, we were running as fast as we could just to stay in place. And I am sure that many other institutions were doing the same.

Most economists expect the current economic expansion to remain slow and uneven for some years to come. Furthermore, 80% of the loan growth in the 1980s came from real estate, leveraged buyouts, loans to less-developed countries (LDCs), and home equity loans. None of these areas have much future growth potential. As an industry, we are not likely to see dramatic growth in revenues.

Moreover, competition between banks will intensify as customers step up their demands for quality products at good prices. Revenue growth will be hard to attain, yet we will be under pressure to deliver high-quality services and products at competitive prices.

Two questions come to mind: What will this mean for the bottom line? Are banks condemned to mediocre performance?

My answer to both questions is No. There will still be winners in the banking environment I described. They will be the institutions that succeed in doing more with less: managing their businesses more effectively, meeting higher standards for quality and service, and using fewer resources to meet their goals. It does not sound easy, and it will not be easy.

Most of our institutions have plenty of room for improvement on the expense side of the balance sheet. Duplication and wasted effort are costing the banking industry millions of dollars. And even in an information-based industry like ours, few of us have unlocked the full potential of technology. The next three to five years, before the economy heats up again, will be an ideal time to wring inefficiencies from our operations.

To some extent, this is already happening through consolidation. Mergers are enabling many banks to benefit from economies of scale. But quite apart from these gains, individual banks can do a great deal on their own. What we need is nothing less than a productivity revolution.

Until now, manufacturers, such as Proctor & Gamble, have been the vanguard of this revolution. Now, service companies--and banks in particular--need to join the front ranks, too.

Fleet Focus '94

In July 1993, Fleet Financial Group announced a sweeping review of all its operations and activities. The program is called Fleet Focus '94, and we expect it to produce fundamental changes in the way we run our business. We intend to reengineer our basic work processes.

Let me emphasize that this program was launched from a position of strength. Fleet is a healthy and profitable company. In fact, Fleet Focus '94 was announced after the company posted record quarterly earnings. Nonetheless, we are convinced that the program is essential if we are going to be able to compete successfully in the twenty-first century.

Of course, cost containment programs are nothing new to Fleet. Similar to other institutions, we have had head-count reductions in the past. The trouble is that we never changed our basic work processes. So after we let people go, we inevitably found ourselves short-handed. To maintain customer service quality, we had to "staff up" all over again.


Reengineering is a radically different approach to cost control. Reengineering means asking basic questions about business infrastructure and the way work is organized. It means eliminating the countless barriers that make it difficult for customers to do business with an institution. …

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