What regionals do best
Australia's regional banks have found a path to survival, based on a simple idea - getting back to their roots.
Australia's regional banks have found a path to survival and it is marked with a simple message: get back to your roots.
That message came through this week in presentations to investors by Suncorp and Bank of Queensland. Both banks are focusing their businesses on the things that regional banks always did best.
They are targeting small sized, well secured lending to customers who want better service than the majors. They are avoiding high risk corporate and property lending and, as a far as possible, matching their loan assets with retail deposits.
The repricing for risk in Australia and elsewhere in the wake of the global financial crisis has forced the regional banks to rethink their roles in the financial system.
They have come to the conclusion that the irrational pricing of risk that allowed them to borrow at virtually the same cost as the major banks will not happen again in the medium term and possibly never be repeated.
They realise that even when things return to normal there will not be a convergence in relative funding costs between regional banks and major banks.
Regional banks can no longer strive to be smaller versions of the majors. That strategy is unsustainable even with a government guarantee of wholesale funding.
As David Foster, head of banking at Suncorp said in his interview with Business Spectator this week (link Suncorp's retail rescue, May 6), Suncorp was paying up to 30 basis points more than the majors for wholesale funding on top of the 100 basis points cost of the guarantee for an A rated bank.
Suncorp's decision to focus on retail banking services and lending to small and medium sized business and agribusiness should be sustainable. The core bank will have retail funding of 60 per cent with a target of 70 per cent.
Suncorp and Bank of Queensland have similar customer targets. It is primarily small to medium businesses wanting to borrow less than $10 million. Larger accounts are closely managed.
It is a lower risk strategy that follows from the repricing of risk in wholesale markets. The opportunity to attack the majors on their turf is no longer there.
Suncorp has shifted about $17 billion in property finance and commercial loan assets into a non-core bank that will be run off the books as contractual arrangements come to an end. That loan book was Suncorp's legacy from trying to match the majors. Its run-off could release up to $900 million in capital over four years according to Deutsche Bank.
The back to the roots strategy goes beyond the de-risking of loan portfolios. It involves regional banks reconnecting with the values that underpinned the success of building societies and credit unions.
Brand loyalty will once again be critical to the success of regional banks. The pitch is summed up in the new slogan for Suncorp's core bank: Capability of a big bank - personal touch of a small one.
A study done for Suncorp by Needscope found that the ideal market for a regional bank consists of 30 to 49 year olds with an average income less than $100,000. This is said to represent 25 per cent of the total banking market.
Suncorp, Bank of Queensland and Bendigo and Adelaide Bank will be actively seeking to capitalise on any customer dissatisfaction from the takeover of BankWest by the Commonwealth Bank and St George by Westpac.
The fact that the regional banks went down a wayward path during the good times was shown this week when Westpac shifted a swathe of accounts out of St George into its institutional bank. It also showed up in the heavy loan losses on the St George loan book.
Although St George under Westpac ownership is continuing to serve large commercial and corporate customers with facilities up to around $150 million, it is unlikely that new loans of that size will be written by St George's business bankers.
Gail Kelly, who grew the St George building society banking model into a fifth major, this week provided her regional bank competitors with tips on how to be successful in regional banking by describing the attributes of the old St George.
She said it is "all about being warm and friendly and people orientated, by being down to earth and passionate about service”.
Westpac will be trying desperately to preserve those attributes in St George and imbue them in Westpac.
There is an opportunity for the remaining regional banks to get back to their roots and deploy those attributes better than the majors. If they are successful the financial crisis will have been a blessing in disguise.
That message came through this week in presentations to investors by Suncorp and Bank of Queensland. Both banks are focusing their businesses on the things that regional banks always did best.
They are targeting small sized, well secured lending to customers who want better service than the majors. They are avoiding high risk corporate and property lending and, as a far as possible, matching their loan assets with retail deposits.
The repricing for risk in Australia and elsewhere in the wake of the global financial crisis has forced the regional banks to rethink their roles in the financial system.
They have come to the conclusion that the irrational pricing of risk that allowed them to borrow at virtually the same cost as the major banks will not happen again in the medium term and possibly never be repeated.
They realise that even when things return to normal there will not be a convergence in relative funding costs between regional banks and major banks.
Regional banks can no longer strive to be smaller versions of the majors. That strategy is unsustainable even with a government guarantee of wholesale funding.
As David Foster, head of banking at Suncorp said in his interview with Business Spectator this week (link Suncorp's retail rescue, May 6), Suncorp was paying up to 30 basis points more than the majors for wholesale funding on top of the 100 basis points cost of the guarantee for an A rated bank.
Suncorp's decision to focus on retail banking services and lending to small and medium sized business and agribusiness should be sustainable. The core bank will have retail funding of 60 per cent with a target of 70 per cent.
Suncorp and Bank of Queensland have similar customer targets. It is primarily small to medium businesses wanting to borrow less than $10 million. Larger accounts are closely managed.
It is a lower risk strategy that follows from the repricing of risk in wholesale markets. The opportunity to attack the majors on their turf is no longer there.
Suncorp has shifted about $17 billion in property finance and commercial loan assets into a non-core bank that will be run off the books as contractual arrangements come to an end. That loan book was Suncorp's legacy from trying to match the majors. Its run-off could release up to $900 million in capital over four years according to Deutsche Bank.
The back to the roots strategy goes beyond the de-risking of loan portfolios. It involves regional banks reconnecting with the values that underpinned the success of building societies and credit unions.
Brand loyalty will once again be critical to the success of regional banks. The pitch is summed up in the new slogan for Suncorp's core bank: Capability of a big bank - personal touch of a small one.
A study done for Suncorp by Needscope found that the ideal market for a regional bank consists of 30 to 49 year olds with an average income less than $100,000. This is said to represent 25 per cent of the total banking market.
Suncorp, Bank of Queensland and Bendigo and Adelaide Bank will be actively seeking to capitalise on any customer dissatisfaction from the takeover of BankWest by the Commonwealth Bank and St George by Westpac.
The fact that the regional banks went down a wayward path during the good times was shown this week when Westpac shifted a swathe of accounts out of St George into its institutional bank. It also showed up in the heavy loan losses on the St George loan book.
Although St George under Westpac ownership is continuing to serve large commercial and corporate customers with facilities up to around $150 million, it is unlikely that new loans of that size will be written by St George's business bankers.
Gail Kelly, who grew the St George building society banking model into a fifth major, this week provided her regional bank competitors with tips on how to be successful in regional banking by describing the attributes of the old St George.
She said it is "all about being warm and friendly and people orientated, by being down to earth and passionate about service”.
Westpac will be trying desperately to preserve those attributes in St George and imbue them in Westpac.
There is an opportunity for the remaining regional banks to get back to their roots and deploy those attributes better than the majors. If they are successful the financial crisis will have been a blessing in disguise.
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