Gita Thollesson joins the podcast to give a sneak peek at a few of the findings she'll share in her upcoming State of Commercial banking webinar.
Questions? Comments? Email Jim Young at firstname.lastname@example.org
Hi, and welcome to The Purposeful Banker, the podcast brought to you by PrecisionLender, where we discuss the big topics on the minds of today's best bankers. I'm your host, Jim Young, Director of Content at PrecisionLender, and I'm joined today by Gita Tholleson. Gita's official title is Senior Solution Strategist for Q2, PrecisionLender's parent company, but regular podcasts listeners will better know her as the purveyor of all sorts of commercial banking data insights. Now, each January, Gita shares some of that knowledge in her webinar, The State of Commercial Banking
, and the next one coming up is the January 2021 market analysis. We'll have a link on the episode page where you can register for that webinar event. But first in today's discussion, we'll give you a little bit of a preview. We'll touch on some of the topics that Gita will cover in the webinar and maybe share one or two of her findings. So Gita, welcome to the podcast.
Gita Tholleson: Thank you, Jim. Good to be here.
Jim Young: So Gita, for those listeners who may not be familiar with this data commercial banking webinar, can you explain what this presentation is? And then what the data is that you're analyzing?
Gita Tholleson: Sure. So we run this analysis every year, as you said, at the beginning of the year, and it's really as bankers are starting the planning process, we like to do a retrospective on what's happened over the past year, but then also take more of a forward looking view as to what's ahead in commercial banking, around things like loan volume, loan demand, pricing, fees, structure, as well as deposits and cross-sells. So really to give people a headstart on the planning for the year to come.
Jim Young: And the data that you're using when you're doing this analysis, what are you combing through basically?
Gita Tholleson: So a couple of different data sources we use. So we certainly rely to a large extent on our proprietary data, that's data coming from over 150 commercial banks and credit unions that are part of the PrecisionLender customer base, supplying data typically on a weekly or monthly basis. So that's part of it. We also do rely on polls. So mostly in terms of trying to get a forward looking view as to what folks are expecting, we do poll customers quite often and share some of that feedback. And as well, to a lesser extent, we use some federal data, some fed enough FDIC data to get some views as to what's happening in the broader market, around things like loan demand and NIM, and that sort of thing.
Jim Young: Okay. And putting together the state of commercial banking, this report, you've made a conscious effort to really make this a mix. Some of this are benchmarks that you revisit every year, but you also try to blend in some new analysis as well. So what are some of the newer things that you're looking at and what was your thinking in deciding to look at them now?
Gita Tholleson: Sure. So obviously, some of the standard topics that everybody wants us to look at time and time again are things like loan demand, pricing structure, and so on.
Jim Young: Right.
Gita Tholleson: But this time around just given the pandemic, obviously the focus among bankers has changed quite a bit. And a year ago, the focus was about where's the next dollar of loan growth going to come from? And that's all changed. I mean now, there's much more focus on credit risk. There's a lot of uncertainty around credit risk. And as well, a lot more focus on net interest margin.
Jim Young: Mm-hmm (affirmative).
Gita Tholleson: How do you preserve NIM? Maybe not preserve it, but how do you at least control or mitigate the decline in NIM? So that's been a big area of focus as well. So because of that, really the two new areas are areas where we decided to do a much deeper dive.
One was around credit risk, but not just measuring the amount of downgrades versus upgrades, everyone knows that this has been a tough market and that downgrades would clearly outpace upgrades. But it was more around what's changed in the industry? How have banks adjusted to the level of uncertainty? How have they changed the way that they're approaching credit risk? How have they changed the timing of making risk adjustments? Or the use of early warning indicators, that type of thing. So it was a little bit of a different vantage point that we looked at here around credit risk.
And then NIM, obviously, has been a big issue for the industry as a whole. We've been in this declining rate environment, and as rates decline, so do margins. And so it was no big surprise that margins would be taking a hit this year, so that's been top of mind for bankers. But in terms of mitigating the erosion in NIM, we thought we'd look at what are banks doing? And things like rate floors, things like cross-sell ancillary business, that have always been an area of focus, but they've become even more important now that loan spreads have been heading downward.
Jim Young: So really, I guess, and this would be my marketing guy trying to simplify things here a little bit, it's not just putting out those raw numbers of here's what happened, but really taking a look almost at the behavioral, here's how banks acted during the year.
Gita Tholleson: Exactly. That's exactly right.
Jim Young: So another brilliant news flashed by me here that 2020 was obviously a year unlike any other for commercial banking, heck for the world. And I'm curious, when you were looking at the data, do you factor in that unique nature of it? Were there any points where you said maybe, "I don't know how much I can draw a conclusion because this may just be a one-off?" Or do you look at it and say, "Actually, this still fits into a larger narrative in commercial banking?"
Gita Tholleson: Yeah. So really, we don't really think of this as necessarily just a one-off, it is a sea change in the commercial banking market. It's a change in the way that bankers have had to approach things, because unlike your typical recession, we were already headed towards a recession, right? I mean the signals were there last year, with the inverted yield curve, and everyone was racing for some flavor of a downturn to come. I mean nobody expected the pandemic. But I think this thing just hit everybody like a ton of bricks and it made everyone realize that you have to be nimble. You have to be able to adjust very, very quickly and really change the business model. And so it did change the way that we looked at things and it made it more important to look at behavior, to look at has there been a behavioral shift as a result of this? Are banks actually changing the way that they're doing business?
So are they changing things the frequency of credit reviews? Moving away from, say, the annual review schedule or looking at risk ratings upon renewal, and then really making more of a fundamental change in the way that they're approaching credit risk. And things like cross-sell. That's been a hot topic for as long as I've been in banking, 30 plus years. And so it wasn't so much a matter of saying, "How important is cross-sell to profitability?" It was more about are banks changing the approach that they're taking to make sure that that business actually comes to fruition, that that business does materialize it. Has there been a change, because that revenue is so much more important now than it might've been even a year ago? So it was more about that, looking at the behavioral changes that were occurring, more than the typical downturn.
Jim Young: Right. Okay. All right. Well let's dig a little bit deeper now. Again, you've given us the overall philosophical approach to this. I'm curious when you're going through that data, what's something you found in there that maybe caused you to raise your eyebrows and say, "I wasn't expecting that?" Or you can be honest, was there anything at all that gave you that reaction?
Gita Tholleson: Yeah, there were a couple of things. I'd say probably for me personally, the biggest surprise was that there is still so much promised business, in terms of cross-sell, that really never comes to fruition. I mean I've heard for a long time that RMs will bet on the come and a lot of banks don't even really have a good mechanism for tracking those promises that have been made. A lot of times, an RM will submit a deal for approval and say, "Yeah, I'm going to get all these deposits and the treasury service business and everything else. And I'll get to 35% ROE before you know it," and the deal gets rubber stamped and then nobody goes back and checks.
So I've heard that for years and years. But I didn't really recognize the magnitude of that disconnect between the promises and actuality until I looked at the data. And it was so striking. I had to go back and double-check and triple-check to make sure it was right. But it was basically that even after a couple of years, more of the promises don't get fulfilled than do. It was really striking. So it really shows not only that bankers are betting on the come, but a lot of banks are still not holding people accountable for the promises that they make.
Jim Young: That is a rabbit hole that we could probably go down, but just by itself and a series of podcasts on. But I want to actually ... Because in particular in that one, and I think in a few other ones, you went beyond that overall here's what the database shows us, and looked toward individual banks and even, heck, down to the individual RM level on some of these things. And what prompted you to take that approach?
Gita Tholleson: Well it's really that the aggregate results don't tell the whole story. And anything that you see in the data, at the end of the day, it's really being driven by behavior. It's human behavior. It's people making decisions. It's RMs making decisions. It's market leaders making decisions. It's the bank culture, things like RM incentives, things like internal reporting and accountability and communication. So really, it's all of those different qualitative factors that vary so much from one bank to the next that we knew going into this would drive some differences in behavior.
But especially when we saw that the aggregate numbers were so striking in terms of as an industry, what people are doing or maybe not doing, we thought well there's got to be more here in terms of individual banks. I have to think that some banks do hold their arms accountable, or some banks are more proactive than the average in terms of looking at early warning indicators and recognizing credit problems. And so it's really about taking those behaviors and then looking at the data from that vantage point to see who's doing well and why.
Jim Young: Got it. Along those behaviors, this is really, to me, just classic human nature, which is the tendency to kick the can down the road when you have a potential problem out there. And it's a question that you asked in terms of when it came to delinquencies and forbearance. And you asked that when both of the data and also of bankers, you mentioned about polling them. And so putting together that data, what's your view on the way that banks approached credit risk in 2020?
Gita Tholleson: Yeah. So when we did ask that question, there wasn't a consensus around the response. So there were some bankers that said, "Yes, we're just kicking the can down the road," as you said, and delaying future credit problems because of this forbearance. We're just not measuring delinquencies today, but those delinquencies are right around the corner. And so a lot of folks said that. But then there were other people that said, "No." This was really a necessary lifeline that customers needed to adjust their operating model.
Jim Young: Mm-hmm (affirmative).
Gita Tholleson: And so I think an obvious example would be restaurants.
Jim Young: Right.
Gita Tholleson: Also the pandemic, a lot of people thought that they would fail as an industry, just given the extended shutdown. A lot of them did.
Jim Young: Yeah.
Gita Tholleson: But a lot of them reinvented themselves. And whether it was curbside pickup, or more social distancing, or other changes, same thing for retailers, on the business side, businesses going virtual. A lot of folks didn't think that would work, that the technology wouldn't support it. And we're surprised to see how well that actually went. And so it wasn't without its hiccups, but things did work out better than expected. And so for a lot of companies, it was just a matter of getting the funds, or getting the forbearance, to buy themselves a little bit of time to figure things out.
For other companies or other industries, the jury's still out. I don't think there's still a lot of concern over, say, the travel industry. There's new concern over the commercial real estate industry, that wasn't really a concern six months ago or nine months ago. But given how well things have worked in terms of virtual work arrangements, people are now saying, "Well do we need as much office space?" And so there's still a lot of uncertainty out there, but a lot of folks are saying people just needed some time to figure things out and have been somewhat successful at that.
Jim Young: Gotcha. I was looking through the draft of the sneak peek that I get on what you've been looking at, and I believe I saw the word, "Optimism," in there at one point, which is not always one that we've sprinkled around.
Gita Tholleson: Right.
Jim Young: So a small spoiler in there, but what is your basis for optimism? And I'm going to go ahead and assume that that optimism is guarded optimism, is that safe to say?
Gita Tholleson: It is safe to say. And so I think we were all very pleasantly surprised by how quickly bankers were able to adjust to the situation that popped up in March 2020. And the fact that they were able to adjust so quickly, I mean look at what they did with PPP. I mean bankers as an industry don't tend to move quite that quickly, and to be able to figure that out and fund those loans and get all that done, now deal with the forgiveness aspect of it, at just record speed, we've never seen bankers move that quickly. And so the fact that they've been able to adjust and the fact that the industry has been able to adjust has given us a lot of reason for optimism. And then obviously late last year, with the news of the vaccine, we realize that although things may take a little bit of time, the economy will be on the mend. And so you put those two pieces together and a lot of reason to believe that 2021 will end a lot better than 2020 did.
Jim Young: Hope so. I hope that when we have this preview podcast in January 2022, we're talking about what a great year 2021 turned out to be for commercial banking. But Gita, again, looking forward to the webinar. Thanks so much for coming on the show.
Gita Tholleson: My pleasure.
And a reminder that the webinar is the State of Commercial Banking: January 2021 Analysis
. The date for that is January 21st, 2:00 PM Eastern standard time. Don't worry, there will be a link to the registration page in today's episode notes. And for those of you who subscribed to our content, we will be sending out links to that webinar registration in the email in your inboxes in the next couple of weeks. Okay, and now for a few friendly reminders. If you want to listen to more podcasts or check out more of our content, you can visit our resource page, precisionlender.com, or head over to our home page to learn more about the company behind the content. Finally, if you like what you've been hearing, please make sure to subscribe to the feed in Apple Podcasts, Google Play, or Stitcher. We love to get ratings and feedback on any of those platforms. Until next time, this has been Jim Young and Gita Tholleson, and you've been listening to Purposeful Banker.
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