As part of our ongoing efforts to better understand Primacy and why it’s such a current focus for commercial banks, we’ve spent quite a bit of time delving into the PrecisionLender Commercial Pricing Database. We’ve posted our previous findings in two blog posts:
Today is the third installment, “Primacy Data, the ROE Impact of Treasury Management.”
Unused Credits: Highly Unprofitable Without Cross-Sell
We continued to look at the impact of credit-only accounts on the portfolio, but from a slightly different angle. We focused on credit-only accounts in which some portion of the credits were not being used.
Not surprisingly, ROEs on credit-only accounts rose consistently with utilization. Absent deposits and cross-sell, unused credits yielded just 2% ROE while high-usage deals (75% or more) averaged 11%. Moreover, the 2% ROE on unused lines was painting a rosier picture than was warranted, as 94% of the credit-only unused lines produced negative ROEs.
Banks that have generated some income on their unused credits – from unused line fees or annual renewal fees – have achieved stronger ROEs but have seldom exceeded 10%. That said, when we looked at the unused credits that also had Treasury Management (TM) in the relationship, we found considerably higher returns: the ROE shot up to 20%.
Sharp Differences in Yield by Relationship Depth
We then looked at variation in ROEs by relationship depth, grouping relationships into (1) Credit-Only, (2) Credit + Deposits, and (3) Credit + Deposits + TM. As expected, the incidence of negative relationship ROE drops steadily as relationship depth increases. More than a quarter of Credit-Only relationships have negative ROEs. The percentage of negative ROE relationships falls to 19% if the relationship also has deposits, and then to just 8% if the relationship has deposits and TM.
On the opposite end, relationships with outsized ROEs were few and far between in the Credit-Only group, becoming more common as relationships expanded. While 11% of credit-only relationships have ROEs north of 50%, that percentage jumps up to 33% when the relationship includes credits, deposits and TM.
Altogether, credit-only relationships produce an average ROE of just 7% while relationships with credit, deposits and treasury management have an average ROE of 30%. Continuing on the theme that led to the title of these findings, adding TM to accounts that already had deposits bumped up the average ROE by an impressive 12%.
As we’ve noted in previous posts, these findings likely only confirm what many commercial bankers already know intuitively: Of course expanding relationships and achieving primacy is important. But what these numbers show definitively is just how important primacy is right now, and how primacy can make the difference between poor and stellar profitability.