The first weeks of the COVID-19 pandemic were a whirlwind for commercial banks, to say the least. But the flood of government loan applications has slowed down and no longer occupies every waking hour for bankers. And though things are certainly not back to normal economically with COVID-19, banks are out of that survival mode and have at least grown accustomed to economic life with the virus.
They now have time to take stock of their surroundings and ask: "What's next?"
That question will be the focus of a series of upcoming blogs here. We'll start today by looking at three potential paths forward for commercial banks. Then we'll follow up with deeper dives into each of those three options.
In the conversations we've been having with banks, we tend to see the answer to that question fall into one of three buckets - and those buckets are very different.
The first group of answers is something like this: “It's time to get back to normal. It's time to just resume business.”
There are big chunks of portfolios that have been put on forbearance and banks have worked their way through at least most of the PPP applications and fundings. Now they're on the back end, dealing with the actual forgiveness of those and deciding how they're going to handle the Main Street lending facilities.
But for some banks it feels like that stuff is, at least the planning and the strategy for that, largely done. So those banks are ready to say, "Okay, the economy's opening back up and it's time for us to figure out which borrowers are ready to move forward in more of a normal environment and start to separate out. There are going to be some credit issues, we'll work those out, but for the most part, it's back to business as usual, we need to get back to growing. We need to fund new loans. We need to find customers that are just ready to resume things.”
It is very much, “Let's get back in the office, let's get back to work and this was all temporary. Off we go now on the same trajectory we were on."
The second bucket is pretty interesting, actually. For these banks, COVID has been like the great accelerator for a lot of trends that were already in place. The investments in technology have been accelerated.
Banks had to process a massive volume of deals, just for PPP. Then there were all the forbearance requests and just customers asking for help. It was a wave of volume like we've never seen before. It came out of nowhere and there was a really short time frame to deal with it, so banks had to put together some digital systems just to be able to survive - to handle a loan application, make a decision, route it to the SBA, get money funded.
They built these things really quickly. Some used vendors. Some built it in-house. Some of them did hybrids, but they figured out: “Hey, that worked. We survived the volume and now we actually have a really good starting point.” Now they can refine what's already there.
Also, some of the banks in this category feel this is not just temporary, that there are going to be some lingering effects and maybe everybody can't come back to the office. Maybe customers are going to be more reluctant to come in and meet them face to face. So they’re going to need more digital channels to be able to interact with those customers.
Banks in this group are looking to spend the next period of time figuring out how to continue the digital momentum they’ve started, even in the people/relationship-heavy commercial lending business.
Then the third bucket is the “It's Recession Time” crowd.
They’re basically saying: “We'd love to get back to business as usual and we would love to build some technology platforms, but we have neither the time nor the budget for either one of those. Because it's time to batten down the hatches. We're going to see some real ugliness in the portfolio. It's time to triage. It's time to figure out which borrowers are really in trouble. We're going to forget about growth for a while. It's time to refill the loan loss reserves and just be ready for what's coming. We're focused on working through credit issues and everything else comes after that.”
Which Path Forward?
We're at a crossroads now, where there are three very different paths forward. It's been interesting in talking to banks: you can have a completely different conversation, depending on the bank - and sometimes even depending on which person you're talking to at the bank.
There's no single right answer to the question: what's next? It's now a matter of understanding the market context and the goals of your institution, and crafting a cohesive strategy to move your bank forward confidently - in whatever direction you choose.
For more help in finding the best path forward for you bank, check out these resources.
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