Magazine article American Banker

Tight Commercial-Loan Margins Force Banks to Get Creative

Magazine article American Banker

Tight Commercial-Loan Margins Force Banks to Get Creative

Article excerpt

Byline: Chris Cumming

Old advice is new again.

Banks are going to have look beyond the loan if they want to keep milking corporate lending for profits, according to a new study.

Pleas to cross-sell have been heard before, but business lending had been so strong in the postcrisis era relative to everything else that the extra effort seemed less imperative. Yet the longtime bright spot has lost some luster lately.

Returns for commercial loans have gradually tightened, to 2.7% last year from 3.2% two years earlier, according to a study released Monday by the Boston Consulting Group.

Loan growth has been robust, but not revenues. Loan volume increased by an average of 10% each year from 2011 to 2014, but revenue grew by just 3% on average, the study said.

Corporate banking still offers healthy returns, "but in the last couple years it has gotten a little less profitable, mostly due to margins," said Pieter van den Berg of the Boston Consulting Group, one of the authors of the report.

Because lending is becoming less profitable, providing other revenue-generating services -- like treasury management and transaction banking -- is more important than ever.

"Lending is still the anchor product, but the money you make on that credit, especially on a return-on-capital basis, has gone down," van den Berg said. "The cross-sell has gone from being a bonus to a prerequisite for having a profitable relationship."

Corporate profits have grown faster than consumer spending since the recession, so banks have turned their focus to commercial clients, and that is unlikely to change even if profit margins keep shrinking. Corporate banking is still a massive revenue driver, especially for the biggest banks. Commercial banking represents about two-thirds of the revenue of the ten biggest banks, and more than half the revenue of the next 20.

However, it is less profitable than it was a few years ago, mostly because of margin compression and higher regulatory costs, van den Berg said. Three-quarters of North American corporate banking divisions have seen their profit shrink over the last three years, according to the consulting firm's benchmarking analysis, which draws from public and proprietary information. …

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