Eighteen months ago, few could have imagined the changes to our world that would occur in 2020 and 2021. The pandemic brought the most significant challenge the global economy since the great recession. This roller coaster ride has produced challenges and left bank and credit union executives wondering how to respond. What approach would meet their goals for borrower assistance, revenue generation, portfolio growth, and credit quality in the years ahead? There are three hurdles to overcome.
#1 - Net interest margin compression
Banks and credit unions are now flush with deposits, but the key challenge is the continuing compression of net interest margins. From the first quarter of 2020 to the same time in 2021, net interest margin for financial institutions with assets below $1 billion fell from 3.69% to 3.37%.
With these slim margins, banks and credit unions should be looking for ways to promote loan growth. More loans on the books can make up some of the shortfall. The good news is that the demand for loans is high. Now that that PPP funds have been exhausted, businesses are once again seeking financing for both short- and long-term working capital, equipment, and more. With low interest rates and unprecedented federal support for community institution lending, the trick is not convincing consumers to borrow - it's winning the race to funding.
In tandem with increasing the number of loans is the strategy of reducing the expense of loan management. Commercial loan origination software produces operational efficiency in banks and credit unions that likely save between 30% - 70% on key back-office workflows. Automation also frees loan officers and bankers to spend more time helping borrowers and generating inbound referrals.
#2 - Increased fintech competition
To win the race for funding, banks and credit unions need to offer attractive, efficient ways to get a loan. Many financial institutions are losing more loans than they generate because prospective borrowers abandon the lengthy, cumbersome application process before completing it.
Cornerstone Advisors reports that in a recent survey of 184 financial institutions, "more than half of the organizations lost more than 75% of the potential loan business." They lose two accounts (or loans) for every account (or loan) opened.1 Borrowers will instead go to a fintech that offers an easy process. As more digital banking alternatives become available, the potential for a consumer to move to a competitor will only increase.
Banking CEOs recognize the problem. A 2021 survey of financial institution executives asked the question; "What is the greatest headwind impeding your lending success in 2021?" The second most popular answer was, "Meeting demand for Amazon-like experiences."2
Simplified online loan applications are not only faster and more attractive, but they increase volume by allowing borrowers to apply when it's most convenient.
#3 - Managing risk
Credit risk issues have surfaced in the wake of the pandemic. For example, what will happen to commercial real estate when so many workers are now based at home? As office space leases expire, there will be adjustments in the marketplace. Banks and credit unions currently carry nearly $2 trillion in commercial real estate loans. Losses could be large for financial institutions with high concentrations of CRE loans.
One response is to incorporate loan participations into long-term growth strategies. This presents the opportunity to supplement organic growth to help meet goals for revenue generation and credit quality.
General economic stresses placed on small- to medium-sized businesses in 2020 and 2021 could also challenge credit risk. For many industries, lenders must now underwrite new requests and renewals in an environment of weaker balance sheets. Community-minded institutions with the technology to manage these risks will have an advantage over others, allowing a more diverse portfolio and revenue stream.
As PPP and other stimulus programs run their course, small business owners will once again seek financing to fund new growth. This presents an opportunity for banks and credit unions to step in, helping to fund the recovery and expansion. It also presents an opportunity for lenders to diversify their portfolios, which was tough for many during the pandemic.
When considering which industries are likely to drive loan demand, a careful eye should be given to those that carry accounts receivable and inventory. While these businesses have the potential to expand, it's likely they will need a source of short-term working capital to make that opportunity a reality. Institutions with the appetite and relevant technology to manage an uptick in business will be well positioned to strengthen customer relationships and drive revenue.
Moving ahead with a sense of purpose
Through all these challenges, bank and credit union executives must ensure that their organizations honor the mandate to serve their communities and to enhance the borrowers' journey. Community financial institutions have a proud track record of weathering troubles while continuing to serve. The current environment is another opportunity to show their dedication.
Jack Henry & Associates Inc. published this content on 14 October 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 14 October 2021 13:21:05 UTC.