Rethinking How to Price Commercial Renewals

Recently Gita Thollesson published her latest Market Insights report; this time she took an in-depth look at how banks handle pricing renewals. 

In "Commercial Renewals: Market Best Practices," Gita reveals several areas in which banks are failing to tap into the revenue potential of their renewals and where they are sometimes taking approaches that are out of step with the deal's risk profile. Gita touches on some of her key findings and offers some advice for banks in this week's episode. 



Helpful Links

Commercial Renewals: Market Best Practices 

6 Ways Your Bank Can Price Better for Risk

Webinar: Commercial Renewal Pricing

Podcast Transcription

Jim Young: 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 for PrecisionLender. I'm joined today by Gita Thollesson, our SVP for client success and market insights. Earlier this month, Gita produced a webinar and a companion report called Commercial Renewals Market Best Practices. Today we're going to talk with her a bit about that topic and some of her most intriguing findings. Don't worry, there will definitely be a link to the report in the show notes. 
Gita, let's start off with a general question here. You talk to a lot of bankers about a lot of pressing subjects for them. What made you decide to focus this report and webinar on renewal pricing?
Gita Thollesson: Well, you know Jim, for a lot of our customers, April through June is the heavy renewal season, so we're really in the throes of renewal season for banks, and especially with audited financials typically delivered no later than the middle of April.
Looking at just the materiality of renewals to the total portfolio returns, what we see is that on average renewals comprise about a third of the market, and there's some banks where it's upwards of 75% of the pricing opportunities or pricing events that those banks have, so it really is significant.
Jim Young: I'm curious about that one. Do you ever come across banks that are maybe at least not on the surface aware of how big of an impact renewals have?
Gita Thollesson: I think most banks know that this is their heavy renewal season, but it's perhaps another question: What do they do about it?
Jim Young: Okay, got you. We were talking off air actually before recording this about an interesting data point you gathered during the live webinar. Can you share that story with our listeners?
Gita Thollesson: Sure. At the start of the webinar, before I shared any details on what we're seeing in the data, I actually did something which is maybe a little bit unfair. I asked the people listening in how often they reprice their renewals. I asked specifically if there's no change in credit quality, how often do you revisit pricing. And I also asked if there is a downgrade, how often do you revisit pricing. In both cases, the responses were almost 90%. So, 90% of the people said, "Yes, we take an active approach to looking at pricing on a renewal, whether there's a downgrade or even if there's no change in risk." That result stands in stark contrast to what we actually see in the data. 
It's interesting because coming into the webinar, I actually had asked this question of a group of bankers at one specific bank where again, it was a little unfair because I knew their results, but in this group of bankers I asked, how often do you look at pricing if there's no change in risk. About half of the people said that they do. Then I asked how about if there's a downgrade, and everybody said yes. So, I was expecting that that would be the result, and it was even more proactive repricing in this audience, which is not what we're seeing in the actual data.
Jim Young: Why is that? I asked you about whether they were aware of how big a chunk of their business renewals are, and you said they've got a pretty good sense of that, but why is there disconnection here where it's yes of course we do this, but the data that you've shown, and again you can find the specifics in the report, show something very different. It says actually a lot of times things are getting rolled over.
Gita Thollesson: Well, I think when you take people away from the day-to-day of doing their job and you ask them to take a step back and tell me would you reprice a renewal if it's downgraded, I mean it almost sounds obvious. Of course, we do. They almost tell you what they think you want to hear, or maybe what they should say. Maybe they even think they're the only ones out there that don't do it. So, they say, "Well yes, of course I revisit pricing. Every pricing opportunity I look at it whether if there's a change in risk or not."
But there are a lot of reasons why bankers generally don't reprice their renewals, even in the event of a downgrade. I mean, there are certain things like an auto renewal process that may be out of a banker's control, so that may be part of it, although that's typically just in the smaller end of the market, but there's also just a lack of intel out there on when the deal was originated. 
Maybe it was originated pre-downturn and maybe the deal has never been repriced even throughout the downturn. There's a lack of information on what the original risk rating was. Some banks can't tell you if the current risk rating is materially different from what it was two or three years ago when the deal was first put on the books. There could be some of that.
There's also a lack of oversight. So, there are a lot of banks where it's almost a rubber stamp on renewals. If the pricing is unchanged, they actually don't go through the same approval process that new deals would have to go through. So it can almost be done by signature.
Obviously, the smaller you get in deal size, the more that's the case, that deals will just be approved without really getting the same level of scrutiny that you would see on a larger deal that might have to go to loan committee or an origination for that matter. 
Jim Young: This may be painful to you because I know how data driven you are, but I'm going to ask your opinion on something in a minute on this. What are some of the, again without rehashing the reports entirely, but what are one or two interesting data points that maybe surprised you when you came across them?
Gita Thollesson: Well, one of them is when we looked at how repricing rates vary based on things like term and deal size, and I think we all expect it. Of course, a longer term you go, the higher the incidence of repricing, or the larger you go, the better oversight there is, the higher the incidence. I was surprised by just how flat the curves are, that you look at deals that have a renewal term of three years and yet still less than half of those deals are getting repriced. You look at the ... I mean, when I talk about large, I mean $25 million commitments, and they're only getting repriced half the time. That's a lot lower than I think a lot of banks would like to see. That was surprising.
I'd say probably the other surprising finding was not within these market averages. We saw a tremendous amount of variance across banks. What was interesting was we took a couple of banks at both ends of the spectrum. So, we took a couple banks that do a really good job at repricing without losing business, and then a couple banks that didn't get such good results. We filtered those banks only looking at banks that had really high customer retention rates.
These were banks that achieved 80% or more customer retention. What was striking was there were some similarities across these banks. The banks that were very successful at repricing their downgrades had kept the increases very modest to no more than a quarter point, whereas the banks that were not successful, when they did ask for an increase, they were setting a bar very, very high at more than a point. So, the takeaway is don't ask for an unreasonable amount because if you do that you're just asking your customer to go out and shop the credit. And even if you feel your pricing is fair, there's always some other bank just waiting in the wings to go and snatch that piece of business away.
Jim Young: You actually, I think you may have just answered the question I was going to ask. What I wanted to ask was, and this is related to a previous podcast that Dallas Wells and I were doing. We were talking about how looking at other industries the way that, you know like with the cable company you can always say, "You know what, I'm thinking about dropping," and they go, "Oh, well what about this special deal," and that sort of thing. His explanation for that was, look the cost of acquisition is such that it's still in their interest to drop price on those sort of things. I was going to ask you, is that a valid excuse or reason for this, but it sounds like what you're saying is, is that not really because it's proven that you can still actually get a little bit more out of it.
Gita Thollesson: You can. The flip side of that point is that there's also a cost to the borrower of switching banks. So, bankers don't really need to match the next irrational bid. I mean typically, you can still get another quarter point or so above the competition, and sometimes even more than that, and not lose the business because it is costly for the borrower to leave. So, there are bankers out there that are under the misconception that if the borrower has another option, they've got to match that bid to even be in the running, and that's not always the case. 
During the webinar, we also talk a little bit about a specific story of where a banker had a really strong relationship with a borrower, and originally there was a huge gap between what he was proposing and what two other competitors offered. When I presented this story to that same institution, but other bankers, and asked them: "If you could get approval for slashing your pricing by 100 basis points, would you do it in this case?" And everybody said yes.
And yet, this particular RM didn't do that. What he did was he went back to the borrower and said, "Tell me where I need to be to keep your business." And ultimately the borrower came back with a price somewhere between his initial offer and the competitor's offer, and it was about 60 basis points above the competition's offer, which shows how the customer valued the relationship, and or recognized the cost of switching banks.
The point being that you don't necessarily have to match the next competitive offer or the next irrational offer, and if you've got a strong enough relationship, you can get last look and you've got to ask for that last look.
Jim Young: So, this is good too because I didn't want this to be a doom and gloom podcast in which we talk about all the ways that banks are failing to tap into-
Gita Thollesson: Not at all.
Jim Young: ... renewal potential. Anything else that you, in looking at the banks, that you saw that were really good at this? Not just getting, retaining business, but retaining business and repricing when necessary or when possible. One or two other common traits or common tactics they share?
Gita Thollesson: Sure. One relates to cross-sell. A lot of bankers tell us that the reason they don't reprice their renewals is because of ancillary business, but one of the observations that we've made is that there are an awful lot of cases where the RM under-price the credit, use the credit as a loss leader in effect and fully expected to win the ancillary business, and yet it didn't materialize. So, one of the best practices that we have seen is in tracking that information, you track what was promised versus what was ultimately delivered. 
Then you have a conversation with the borrower about that and say, "Look, we've got to get a return on capital for our shareholders." It's incumbent upon every bank to do that. "We initially gave you this really favorable credit pricing based on the understanding this business would come our way. It hasn't, so we've got two options here. We can either move that business over now, before the renewal date, or if that's not a possibility, then we can get the renewal done. The price will be X." So in effect, explaining to the customer the rationale, and then essentially using that to have the customer make the decision. That applies to both cross-sell, as well as risk-based pricing. 
So, if the borrower's financials are headed south, explain the concept of return on capital, on a risk adjusted basis, and explain to the customer that while we may have to increase your pricing today, it'll go the other way once your financials return to prior levels. So, it's that rationale. It makes a huge difference in the discussions.
Jim Young: Yeah, and what you just did too there was something you talked about a little bit in the report, which is being able to have the discussions, how to have those conversations because you could offer that as a threat. You could say essentially, "If you don't do this, then this will," but you've framed it in sort of a, "Here are your options actually. We're not accusing anybody of holding out, or anything like that. We're just saying this hasn't happened, so this was the original deal." It's a much more less confrontational, and it sounds, the way it's phrased it empowers the customer. They still have a choice.
Gita Thollesson: Exactly. The customer's in the driver's seat at that point, absolutely.
Jim Young: Great. Well this is, again, I highly recommend that you check out the report. Again, we'll have the link in the show notes. The title of it is Commercial Renewals: Market Best Practices. Also we'll have a link to the webinar as well, if you want to go and listen to Gita go through a lot of these really just great data, really interesting findings and really valuable tips and tactics and suggestions on how banks can tap into what's really a big area of potential in terms of renewals.
So Gita, thanks again so much for coming into the studio. 
Gita Thollesson: My pleasure. Good to be here.
Jim Young: All right. Well, that'll do it for this week's show. 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 at, or you can just head over to our home page to learn more about the company behind the content. Finally, if you like what you've been hearing, make sure to subscribe to the feed in iTunes, Sound Cloud, 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 Thollesson, and you've been listening to The Purposeful Banker. 

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