A new study by the ROIG Group found that only about 11 percent of U.S. banks are well-positioned right now to adopt growth activities.
Conversely, the other 89 percent should be focused on other challenges to drive value, the study stated.
The study was based on an examination of 397 U.S.-based publicly traded banks using 2021 data. It looked at various data points, including net interest and non-interest income, efficiency ratio, equity capital, the cost of equity capital, and market value, amongst others. Based on these factors, the banks were categorized into one of four buckets — Revive, Optimize, Incubate or Grow. Banks with a Grow designation are in the best position to evaluate acquisitions, explore product or service diversification, or pursue customer, channel, or market innovation choices.
“Most executives are wired to grow, resulting in too many companies being hyper-focused on growth activities, such as product and service expansion, growth through acquisitions, attracting new customers, expanding channels, and diversifying product and service offerings through new capabilities, when they are not ready to successfully execute,” Rob Willey, managing partner at The ROIG Group, said. “Getting the strategic direction right really matters, and getting it wrong can be disastrous,”
Only 11 percent fell into the Grow designation, which means not only are they profitable today, but the market believes they will be more profitable in the future. The challenge for these banks is to make sure the five-year business plan contemplates the right mix of growth. Growth options include product and service expansion, product and service diversification, acquisitions, and exploring new customer markets and channels.
The largest group, 56 percent, fell into the Optimize designation. This group is profitable today, but the market believes it will be worth less in the future. Optimize banks need to invest in improving the customer experience on one side while optimizing expenses and assets on the other. Streamlining should be the mantra for this group, and growth efforts outside of existing capabilities should be scrutinized. Also, acquisitions need to be carefully vetted.
In addition, 33 percent fell into the Revive category. These banks do not deliver profits in excess of their cost of equity capital and may even face liquidity challenges. Also, the relationship with their best customers is fractured. Revive banks must focus on fixing what is broken, lowering non-customer-facing expenses and underperforming assets, and improving the earning asset mix. CEOs must be prepared to place large bets to turn the company around.
The study says banks have inherent strengths to compete in the payments race, but they stay in their lane, as ROIG Group’s Payments and Financial Services Practice Lead Sheree Thornsberry explains.
“They can be taken by surprise when they realize what they are trying to build does not fit with the structure, designation, or capabilities of their organization. What a bank should work on, and more importantly, how they should approach the work, is materially different depending on designation,” she said.