A Review of Four Critical Drivers of Bank Performance.

Transcription

1 A Review of Four Critical Drivers of Bank Performance. Strategic Update, May 2007 Competitive Landscape Deposit Growth Delivery Channel Relationship Management

2 1 STRATEGIC UPDATE This Strategic Update is a follow-up to the most recent rounds of CEO Strategies Group meetings held in April. Four critical areas will be highlighted in this document. 1) Competitive Landscape: understand the new competitive threats facing the banking industry. 2) Deposit Growth: recent RFG research shows consumers acceptance towards new deposit product offerings. 3) Delivery Channel: discover the changing delivery channel behavior of consumers. 4) Relationship Management: identify the four relationship management trends reshaping the banking industry.

3 KEY ISSUE: Slow HH and Balance Growth Rates 2 What Factors Are Behind These Anemic Growth Rates? Aggressive Branching of Large Banks New, Innovative On-Line Competitors ING Direct, HSBC, Citibank, WAMU Direct The Credit Union Movement to Community Charters Household Retention The following pages will address the lack of growth that community banks are experiencing.

4 AGGRESSIVE BRANCHING OF LARGE BANKS 3 Average number of domestic offices Banks of all sizes have increased the number of branches, but the growth of branching is most significant among the largest banks. Banks with assets in excess of $10 billion increased the number of branches from 291 to 363 in the last two years. Some of this growth is organic, while some portion represents acquisition All Credit Unions All Banks Under $100M $100M to $500M $500M to $1B $1B to $10B Over $10B Source: NCUA and FDIC (June data); includes only domestic offices

5 NET CHECKING GROWTH PER BRANCH WA MU B of A JP Morgan Chase 11 Wachovia 7 Community Banks* 14 Community CUs* Net New Checking Accounts per Branch per Month Source: Shareholder Reports, CEO Strategies* The chart is based on shareholder report data as well as CEO Strategies data. Illustrated is the average number of net new checking accounts opened per branch per month. It is clear that WAMU and B of A are exhibiting the strongest levels of net checking growth both have shown significant increases in What is the source of this growth? In part, it may be community banks. Almost one in five community banks examined by RFG experienced a net loss of checking accounts in the period analyzed.

6 YEAR END 2006 UPDATE Million New Net Checking Accounts Average Deposit Balances Increased By $23.9 Billion (An 8% Increase) Driven By The Addition Of The MBNA Deposit Portfolio 5,700 Retail Banking Offices, Nearly 17,000 ATMs, and An Online Banking Service That Has More Than 21.0 Million Active Users Checking Accounts Grew by 4.7% Consumer Checking Balances Grew by $5.8 Billion 11% Cross Sales Ratio Increased to 5.2 Products per Consumer Household Average Retail Core Deposits Grew $14.4 Billion, Or 11% From 2005 Source: Company Earnings Release.

7 YEAR END 2006 UPDATE 6 Checking Grew by 1.2 Million to 10 Million Just Over Half (615,000) Came From Bank of New York Acquisition Net New Checking Grew by 555,000 in 2006 Compared to 535,000 in % Growth in Consumer Service Charges Source: Company Earnings Release.

8 YEAR END 2006 UPDATE 7 Opened 1.23 Million Net New Checking Accounts Deposit Fees Up 17% to $2.6 Billion Retail Cross Sales Ratio increased From 6.63 to 6.66 Net Income Totaled $1.2 Billion (Down 20% From 2005) Average Core Deposit Balances Increased To $59.4 Billion (Up 3%) Noninterest Income Was $417 Million Lower From 2005 Source: Company Earnings Release.

9 YEAR END 2006 UPDATE 8 Core Deposits Grew 18% to $6.2 Billion (Up 18% From 05) Comparable Same Store Growth Was 17% (Open One Year or More) Noninterest Income Up 29% to $588.5 Million Net Interest Margin Down (3.52% To 3.27%) 55 New Stores in 2006 Approximately 65 More in 2007 Source: Company Earnings Release.

10 9 NEW INNOVATIVE ONLINE COMPETITORS In the fall 2006, it was reported that: ING Direct had $40+ billion in deposits HSBC Direct had attracted $4.8 billion Citibank Direct has attracted $4.7 billion (HSBC and Citbank being late entrants to the market) Citibank and HSBC use a different brand names to avoid having current customers move their deposits to the higher-paying online unit

11 INTERNET ACCOUNT STATUS 10 Would Not Consider an Internet Savings Account 64% Currently Use an Internet Savings Account 8% Do Not Use, Would Consider 28% Some financial in stitutions offer spec ial rates on low minimum balance sav ings accounts that are available only through the Internet, by mail or by phone. For example, at ING Direct Bank, savers can earn 4.50% to 5.25% on their money and there is no minimum balance required. The account is opened, accessed and funded through the use of the Internet, mail or phone. Please indicate your status and feelings about having a no minimum balance, high rate Internet access savings account. (Check One Box) I currently use an Internet savings account I do not currently use, but would consider an Internet only savings account if the rate was good I would not consider using an Internet only savings account Percent of All Households Source: RFG SPSG S07

12 INTERNET ACCOUNT STATUS BY SEGMENT 11 Credit Driven And Upscale Have A Greater Propensity To Use An Internet Savings Account 18% 19% 14% 10% 8% 7% 7% 8% 4% 6% 4% 4% 2% 1% Total Fee Driven Credit Driven Middle Market Low Income Depositor Fall 2006 Spring 2007 Middle Income Depositor Upscale Source: RFG SPSG

13 INTERNET ACCOUNT STATUS BY SEGMENT 12 Credit Driven And Upscale Are More Likely Than Average to Use An Internet Savings Account at ING Direct. 10% 7% 5% 4% 3% 3% 3% 2% 2% 3% 3% 3% 4% 1% 2% 1% 1% 1% 1% 1% 0% Total Fee Driven Credit Driven Middle Market Low Income Depositor Middle Income Depositor Upscale ING Direct Other HSBC Direct Source: RFG SPSG Spring 2007

14 INTEREST RATE NEEDED TO MOVE TO AN INTERNET SAVINGS ACCOUNT 13 If you were to move funds to an Internet only bank, how much higher would the rate of interest on the savings account at the Internet only bank have to be compared to the rate on the savings account at a traditional financial in st itution? (Check One Box) 1.75% 1.79% 0.10% 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00% More than 2.00% Source: RFG SPSG Fall 2006 Spring 2007 Fall 2006 Spring 2007

15 ATTITUDE ABOUT KEEPING FUNDS AT AN INTERNET SAVINGS BANK 14 W hich of the following applies to how you feel about keeping funds on deposit at an Internet only bank like ING Direct? (Check One Box) I would keep the majority of my savings with an Internet only bank if the interest rates were attractive enough I would keep the majority of my funds at a traditional bank with branch offices even if the Internet only bank had a better interest rate Source: RFG SPSG 60% 77% 40% 23% Most Would Keep The Majority Of Funds At A Trad it ional Bank Keep Majority of Savings at Internet Bank Keep Majority at a Traditional Bank Fall 2006 Spring 2007

16 ONLINE CHECKING ACCOUNTS 15 Common Features: Debit card is prominent No paper checkbook No paper statements No teller access Bills paid online Deposits are electronic or via mail Free ATM access High yield on balances Significant Online Checking Competitors 1. ING DIRECT 2. HSBC Direct 3. E-Loan 4. E-Trade

17 CHECKING MARKETING TACTICS SEEN IN THE MARKET 16 Offering One Free NSF per year Designed to drive in new checking accounts NSF fee waiver is not automatic customer must call to request the waiver Existing checking accounts do not have this feature; existing checking customers must convert to this account to obtain this feature Cash Incentives Typically range from $50 to $100 for a new account Increasingly common to require direct deposit, online banking, and debit card to receive maximum incentive amount Can also be coupled with e-statement requirement Merchandise Incentives To differentiate from cash incentives, a few inst itutions have reverted to merchandise incentives for checking Incentive may require channel usage as above or another account opening (such as a credit card) W ith any incentive, make sure incentive is not too valuab le, as accounts may open only for the incentive but do not remain; account attrition rates will be higher High Interest Rates Standard high-rate checking generally behaves like an MMA with enhanced level of liquidity Some inst itutions are linking payment of high rate with required levels of activity in key channels such as online billpay and debit card Keep the Change Programs Innovative debit card program that rounds debit card transactions up to the nearest dollar and deposits amount into savings account, matching some portion of this amount

18 VALUE OF CHECKING ENHANCEMENTS 15% Free Checks Source: SPSG 11% Debit Rewards - Cash 7% ATM Surcharge Rebates 6% One Free NSF 7% Debit Rewards - Points Projected Impact on Market Share 5% Extended Hours 17 To what extent might debit rewards influence the select ion of a checking account? How valuable are ATM surcharge rebates? Research indicates the relative value of several different checking enhancements. Of the six enhancements tested, free checks rated as the most valuable enhancement. A cash-based debit rewards program was second most valuable, while a pointsbased rewards program did not carry nearly as much value. Points-based programs offer advantages for the institution because of the typically low level of redemption seen in these types of programs.

19 VALUE OF SURCHARGE REBATES INCREASES WITH HOUSEHOLD INCOME Additional research that supports the concept of ATM surcharge rebates is shown on this page. 48 The chart illustrates that the relat ive value of ATM surcharge rebates increases dramatically with household income. Households with income of over $100K show a 50%+ increase in relative value for this attribute compared with low income households under $30K, from 48 to 74. Less than $30k $30k to $50k $50k to $100k Over $100k Source: SPSG Utility Value of ATM Surcharge Rebates

20 REWARDS CHECKING 19 Banks and Credit Unions Are Offer Rewards Checking Account In 2006 and 2007, many institutions have begun promoting a Rewards Checking account. The product pays a high interest rate, often on only the first $25,000 of daily collected balances. Recently, some institutions have begun offering rates as high as 6% on these checking accounts. To be eligible for this promotion, consumers are required to use e-statements, be an active online banking client, use the bank s debit card at least 10 times each month, and have a recurring direct deposit or automatic draft tied to their account. The Reward Checking Account has no minimum balance requirements or monthly service fees, and offers unlimited check writing privileges. Accountholders also receive a free debit card, free online banking and free online bill payment services. Some are also offering ATM surcharge rebates. Industry consultants are starting to push rewards checking accounts which require customers to change behavior to get best rate (on first $25,000 in balances). If the customer does not meet all the requirements the rate is often 0%. On the next page, RFG recent research addresses the impact these requirements have on the customer s likelihood to open a rewards checking account.

21 IMPACT OF REWARDS CHECKING REQUIREMENTS 20 Direct Deposit is the requirement that is most accepted by consumers. 61% 59% 66% Having a minimum number of checks per month is the least accepted by consumers. 31% 32% 14% 13% 9% Direct Deposit T hree Debit T ransactions Active Online Banking Minimum Number of Checks Not an Issue Would Not Open Account Source: RFG SPSG Spring 2007

22 PERCENT CITING REQUIREMENT IS NOT AN ISSUE 21 43% 31% 32% Credit Driven households are more accepting of requirements to obtain a rewards checking account. 26% 14% 11% 13% 20% 17% 9% 8% 8% Direct D epo sit Th ree Deb it Transactio ns Active O nline Banking Min im um N umb er o f Checks Total Credit Driven Upscale Source: RFG SPSG Spring 2007

23 MMA MARKETING TACTICS SEEN IN THE MARKET 22 Many institutions are rolling out new tiered Money Market Accounts Rates at each tier lower than that availab le for High-Minimum MMA the institution may offer Designed to be an account that appeals to moderately rate-sensitive money High Rate High Minimum MMAs A few are imposing high fees when the minimum balance requirement is violated ($10 to $25 per month) Linkage to Checking Many of the high-rate or Tiered MMA accounts are requiring the customer to open a checking account in order to receive the best rate Indexed Money Market Accounts Rate on MMA tied to external index such as 91 day T-bill rate Best option from a cost of funds perspective is to allow the institution to modify the linkage to the index (using language such as based-on ) Internet-Only Money Market Account An number of large institutions are now offering rates on MMAs that are available only to accounts opened online Objective is to generate new funds, often outside bank s footprint, without significantly increasing the institution s cost of funds Essential issue: branding under existing institution name or creating a new brand; most large institutions have opted to use existing brand

24 MMA STRATEGY 23 Silver MMA $25, % $5 / month (minimum violation) Gold MMA $50, % $7 / month (min violation) Platinum MMA $100, % $10 / month (min violation) MoneyManager MMA 4 Tiers $10, % $25, % $50, % $100, % Advantages: Institution rewarded for managing lazy money Built in promotional growth strategy

25 HOME EQUITY MARKETING TACTICS SEEN IN THE MARKET 24 Combination Equity Account HELOC with consumer option to convert some portion to a fixed rate equity loan Bank typically charges fee for conversion - $50 is common This product is too complicated as a lead product; lead with line or loan and upsell into the Combo Equity account Fixed-Rate HELOC Typically 3 and 5 year options; there are some 7 year options Typically a high minimum draw - $20,000 or higher must be drawn at closing Interest-only is a common feature Often can impose an annual fee on this account Interest-only Option Focus in marketing is on the payment amount, not the rate Teaser Rates Often requires checking in order to get the best rate Teaser in effect for 6 months 2007 Op en Solutions Inc. Raddon Financial Group (RFG) is a business unit of Open So lutions Inc. All Rights Reserved / Confidential

26 25 CHANNEL USAGE PATTERNS Traditional Delivery Channels Online Usage Patterns

27 DELIVERY CHANNEL USE (FALL 2002 vs. SPRING 2007) 26 Lobby usage is not declining. 64% 67% 58% 59% 60% Electronic usage is growing at a rapid pace. 53% 54% 47% 46% 29% 28% 19% 15% 12% 14% 22% 21% 6% 8% 12% Lobby Drive -Up Branch ATMs Foreign ATMs Debit Card Call an Emp. AVRU Online Banking Elec Tele. Bill Pay Online Bill Pay. Fall 2002 Spring 2007 Source: RFG SPSG

28 ONLINE BANKING AND BILLPAY TRENDS 27 Source: RFG SPSG 50% 45% 40% 39% 46% Growth of online banking and bill pay. 35% 30% 31% 32% 34% 30% 29% 25% 20% 21% 23% 26% 15% 10% 14% 12% 17% 5% 5% 0% Online Banking Bill Payment

29 ONLINE BANKING FORECAST 28 Source: Forrester Research, Inc. 70% 60% 50% 49% 53% 56% 60% 63% Forrester Research, Inc. projects the online banking growth to continue. 40% 30% 20% 10% 0% Online Banking

30 LIKELIHOOD TO USE AN ONLINE SERVICE IN THE NEXT 12 MONTHS (Base: Percent of HHs wi th Internet Access) 29 15% Check orders and alerts have the highest upside. 11% 10% Online Bill Pay and Online Banking are lower due to the fact that a high percentage of households already are using these products. 7% 7% 7% 5% 4% 3% Order Checks Alerts Online Statements Onlin e Bill Pay Ch eck Imaging Onlin e Bankin g Apply Loan Purchase Sto cks Depo sit A cct Source: RFG SPSG Spring 2007

31 FINANCIAL ACTIVITY CONDUCTED ON LINE (Base: Percent of HHs wi th Internet Access) 30 17% 33% 16% Source: RFG SPSG 19% 9% 16% 12% 10% #1 31% 14% 13% 10% The best online revenue opportunity for banks is online lending for Credit Driven HHs (young affluent customers). 16% 9% 8% 7% Shop for a Loan Shop for Savings or CD Apply for a Loan Open a Savings or CD Total Credit Driven Middle Market Upscale

32 31 Question: What are the trends in relationship management? 2007 Op en Solutions Inc. Raddon Financial Group (RFG) is a business unit of Open So lutions Inc. All Rights Reserved / Confidential

33 FOUR TRENDS IN RELATIONSHIP MANAGEMENT 1. There is an increasing focus on the Mass-Affluent Market Investable assets of $100K to $1 million Relationship Management Programs are increasingly implemented among banks Book of business concept targets top 20% of customers, based on combination of household profit and balances Compensation for Personal Bankers is variable, based on new account production and retention May reward only for core accounts (checking, MMA, mortgage, HELOC, investments, etc.) 3. Rewards Programs are evolving into Enterprise-Wide programs Rewards are given for all aspects of financial behavior, not just card purchases Citibank and National City are prime examples 4. New Household Onboarding Programs are increasingly common 2 day / 2 week / 2 month programs provide consistent and early contact Follow-up contacts are service oriented calls Typically at least one contact is telephone; others may be letter or Op en Solutions Inc. Raddon Financial Group (RFG) is a business unit of Open So lutions Inc. All Rights Reserved / Confidential

34 Why Should We Be Looking At The Mass Affluent Market? 33 Two-thirds of a consumer s portfolio are in noninsured products such as mutual funds Mutual fund growth is significantly stronger than deposit growth Mutual fund sales represent a better profit opportunity than do many deposit products 2007 Op en Solutions Inc. Raddon Financial Group (RFG) is a business unit of Open So lutions Inc. All Rights Reserved / Confidential

35 Percent of Balances 75% 50% 25% % 51% 49% 45% RETAIL INVESTMENTS AND INSURED DEPOSIT BALANCES For Banks to serve the Mass-Affluent market, the investment business must be addressed. 62% 38% 72% 28% 63% Two-thirds (68%) of all retail investment and insured deposit balances are held in mutual funds. 37% Feb % 32% Svgs/MMA/CDs All Mutual Funds 2007 Op en Solutions Inc. Raddon Financial Group (RFG) is a business unit of Open So lutions Inc. All Rights Reserved / Confidential

36 EQUITY MUTUAL FUND AND DEPOSIT GROWTH TRENDS 35 $7,000.0 Banks are recognizing that the real growth is in the investment business. $6,000.0 $6.09 Trillion $5,000.0 Equity Mutual Funds 16.6% CAGR Billions $4,000.0 $3,000.0 $2,000.0 $1,000.0 $0.0 Savings / MMA 3.8% CAGR Certificates 18.9% CAGR Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 $3.78 Trillion $1.18 Trillion Dec-05 Jan-06 Feb-06 Mar-06 Apr- 06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Source: Investment Company Institute, Federal Reserve 2007 Op en Solutions Inc. Raddon Financial Group (RFG) is a business unit of Open So lutions Inc. All Rights Reserved / Confidential

37 INFLUENCE OF ENTERPRISE REWARDS PROGRAMS Rewards programs will not tend to drive consumers to change financial institutions 58% say they would not move accounts to an institution offering an enterprise rewards program. However, Credit Driven may be a little more receptive to these types of programs. The implication is that these programs will have more of an impact on retention and relationship deepening than on new household growth % 44% 25% 24% 17% 16% 2% 4% Currently Participate Would Use at Current FI Would Consider W hen Switching Would Not Move Ac counts Total Credit Driv en Source: RFG SPSG Spring Op en Solutions Inc. Raddon Financial Group (RFG) is a business unit of Open So lutions Inc. All Rights Reserved / Confidential

38 INFLUENCE OF REWARDS ON ACCOUNT CONSOLIDATION One-fifth (19%) of current participants in enterprise rewards programs have consolidated accounts to get rewards points. Three in five would not do so. 37 This simply reinforces the point that rewards programs should be targeted to high value customers as a retention tool. Have Consolidated Accounts for Rewarrds, 19% Would Consolidate Accounts for Rewards Points, 5% Would Not Consolidate Accounts for Rewards Points, 61% Do Not Know, 16% Source: RFG SPSG Spring Op en Solutions Inc. Raddon Financial Group (RFG) is a business unit of Open So lutions Inc. All Rights Reserved / Confidential