Historically low interest rates coupled with a strained net interest margin and excess liquidity have forced many banks to grow loans to preserve bank profitability. Many banks have resorted to aggressive pricing including extended maturities/amortizations and fixed rates. The current interest environment is changing rapidly, and the economy is slowing requiring banks to rethink their loan pricing. Unfortunately, many lenders have no concept of the required loan pricing to cover the bank’s costs and meet its profit objective. Lenders focus on rate when pricing loans rather than considering the value of the relationship including the rate on the loan, fees, and the value of the deposit relationship. Compounding the problem, lenders have not learned how to win the borrower’s business on a basis other than rate.
Lenders can add significant value by using their knowledge of the customer’s business and insight gained from financial analysis to show the customer how to make more money. This added value merits additional compensation. Many banks have found that employing a structured approach to loan pricing emphasizing value added can increase the bank’s net interest margin by as much as 40 bp.
The business of banking is risk management which includes pricing for risk. Traditionally, banks have done a poor job of pricing risk. Lenders often do not have a clear sense of how to translate asset quality (risk) ratings to risk premiums to be incorporated in loan pricing.
This session will address the following topics:
- Defining the measures and the determinants of bank profitability
- Understanding the bank’s value proposition, competitive strategy, pricing philosophy
- Educating lenders on the bank’s cost structure
- Calculating the required return on a loan and alternatives to achieve the required return
- Pricing for risk
- Pricing based on the value of the relationship
- Utilizing performance-based pricing
- Using the bank’s credit underwriting process to identify opportunities to add value turning what the borrower perceives as a cost, providing comprehensive financial information, into a benefit and getting paid for the value added
- Identifying opportunities to broaden and deepen the relationship with the customer
- Convincing the customer, the bank/lender has added value to the relationship and should be paid for the value added
Who Should Attend:
Lenders with 1-3 years’ experience, more seasoned lenders as appropriate, senior management