You may have noticed that a theme has emerged in our recent podcasts and blog posts, Primacy – becoming the primary bank for valued clients – has been on our minds quite a bit recently. That’s because it’s been on the minds of the bankers we talk to each day. At some point in those conversations, Primacy – how to define it and how to achieve it – is bound to come up.
That said, it’s not like primacy is a brand-new concept. So why has it vaulted in recent months to the top of the to-do list at many commercial banks? We dug into the PrecisionLender pricing database to look for potential explanations.
Credit-Only Isn’t Cutting It
The lending environment of the past two years – particularly since the start of the pandemic in 2020 – has not been a friendly one for bankers seeking to build relationships purely around credit. Thanks to rate drops that weren’t always accompanied by drops in funding costs, ROEs on credit-only relationships have declined more than 200 basis points in the past 24 months.
Cohort Group of Credit-Only Relationships
Deposits Aren’t Really Helping
In the previous market cycles, deposits were extremely attractive to banks – a way to maintain or even improve spreads by lower funding costs. But currently deposit costs aren’t really much cheaper than wholesale funding options. As the chart below shows, even though these relationships have experienced significant deposit growth in the past two years, that’s only been enough to tread water when it comes to ROE.
Cohort Group of Relationships with Credits & Deposits
But If Banks Can Broaden the Relationship …
We then looked a third group of commercial relationships. This group started off as credit-only but then expanded to include both deposits and ancillary fee-based business. They’re looking more like the type of primary relationships banks are now focused on winning – clients who have decided to keep a large portion, if not all, of their accounts with the same institution.
The ROE payoff is a handsome one – an average increase of ~190 basis points over the past two years.
Cohort Group of Relationships - Cross-Sell Growth
Taken together, these three charts tell a story that help explain why Primacy is the topic du jour at many commercial banks. Simply trying to lend your way past the stress that 2020 put on your portfolio isn’t an option; it’s actually a game of diminishing returns. And adding deposits, something banks have had no trouble doing the past two years, is only enough to keep your bank essentially running in place. To make a significant impact on the bottom line, banks need to build broader relationships, the kind that occur when they’ve become the primary financial institution for the client.