Last month we looked at the PrecisionLender commercial pricing database to see if we could get some explanations for why Primacy – i.e. becoming the primary bank for your most valued customers – was such a hot topic right now at financial institutions. We published those findings in this blog post.
But the answers we found there naturally led to more questions, such as:
- Are there situations where credit-only deals are the right choice?
- Is there a downside to a “land-and-expand" strategy with commercial customers?
- Just how much better are broader relationships for the bank’s portfolio?
This prompted another deep dive into the data, and another round of findings to share.
The Bigger the Credit, The Bigger the Need to Cross-Sell
Though we previously detailed the significant ROE upgrade that comes with broader relationships, bankers will often argue there are situations in which it’s worth it to book a credit-only deal. We looked a variety of banks, from a wide range of geographies and asset sizes, and found that to be true … but only in a very select set of situations.
Credit-Only Accounts: Spread Over COF vs. ROE by Size
Depending on the bank’s cost and capital assumptions, small business loans can be profitable even without cross-sell. But as loan sizes rise (and margins narrow), the ROE on credit-only relationships drops markedly. In some cases (see Bank B), bankers may end up booking large loans that actually have a negative ROE.
Credit-Only Can Stay That Way for a Long Time
Perhaps that relationship is only meant to stay credit-only for a brief time. Even if the ROE isn’t great initially, it can be worth it to “land” the relationship, so you can “expand” later, right?
In theory, yes, but in reality, for a considerable number of commercial relationships, “credit-only” is not a temporary status. Winning ancillary business takes time. And sometimes it never happens. Nearly a third of credit-only relationships that started between 2016-2019 have yet to add any non-credit accounts. Going back more than 10 years we found 15% of relationships that started then were still credit-only today.
Credit-Only Incidence as of August 2021
By Relationship Start Date
In previous research we’ve found that banks have historically failed to reprice credits over time, even when anticipated cross-sell did not materialize, leaving the portfolio with underperforming relationships that drag down performance for years.
Broader vs Credit-Only: Bank-Level Views
The case for credit-only relationships gets even weaker when they’re placed side-by-side with broader relationships (credits+deposits+fee-based business). Again, we looked at a cross-section of banks. Obviously, bankers know “broader is better,” but they may not have realized just how much better these relationships are for the portfolio.
Credit-Only vs. Broader Relationships
Relationship ROE by Size of Credit Relationship
These latest findings further confirm the conclusion we reached in our previous post: As banks try to find their footing after the upheaval of 2020, it's not enough to just have a goal of broadening relationship and achieving Primacy with valued clients. They need a concrete plan - including processes and technology investments - for how to get there.