The Stephen Stills song from the 1970’s “Love the One You’re With” best encapsulates the approach businesses should adopt with their banking relationship In the current challenging economic environment.
Now is definitely not a good time to be looking for a new banking relationship. Businesses will almost invariably do better with their incumbent bank than they would if they were to switch to another bank.
Banks are finding it increasingly difficult and expensive to raise funds so the limited funds they do have are deployed to get the most bang for their buck in terms of return but even more importantly in credit quality.
Whilst a bank can increase its revenue by taking on higher risks and charging accordingly, preservation and protection of capital are more critical. Banks are already highly geared businesses and accordingly can ill afford further blows to their capital bases, besides higher margins never compensate for a bad debt.
Whilst banks are restricted in the funds available to lend they and the markets still hold expectations of increasing shareholder returns. In these circumstances banks tend to only lend where it is absolutely safe which usually means quality existing customers with a strong record. These fortunate businesses have little difficulty in accessing credit on competitive terms and conditions. However if your business is not seen by the bank as being top quality, life is much tougher. Decisions can take an inordinate amount of time and the hurdles which need to be overcome often seem insurmountable.
Given the difficulty in accessing funding at pre GFC levels and pricing combined with the current uncertainty in the global economy as well as heightened prudential and legislative requirements such as Basel III, it is no surprise that banks have become so careful about ensuring their limited capital is safely and securely deployed.
But if you think it is tough dealing with your current bank, don’t for a moment think that changing to a new bank will satisfy all your needs. Currently banks are loathe to take on new lending from other competitors. The very first question asked by the credit managers when a business is looking to refinance from another bank is “why are they leaving?” If there is even a hint that the business has been or could be in some difficulty the conversation goes no further.
The banks’ default position is that if a business is looking to switch there must be something wrong and the onus is placed on the relationship manager to prove this is not the case. Some find this process tedious and frustrating and ultimately do not approach winning new business with the same level of enthusiasm as perhaps they displayed some time back.
This behaviour is also reflected in or perhaps driven by the changes in the incentive systems employed by banks. Banks generally adopt a philosophy that the easiest and quickest way to change the behaviours of their bankers is to put a financial reward or disincentive around certain outcomes. In recent years, banks have rewarded the relationship managers who sold the most loans. Luckily the rising market camouflaged many poor lending decisions. Now that the tide has gone out and it is apparent who has not been wearing bathers the banks have shifted their focus away from rewarding new lending and more towards protection of and return on their capital base. This means that now bankers’ key performance indicators are skewed more toward the quality of their loan book and the return on equity generated by those loans rather than the volume of loans written.
These days writing a loan which turns bad can be a career inhibiting event which all bankers wish to avoid. So when it comes to prioritising between the bank’s balance sheet, the banker’s career and the customer’s needs it is a pretty simple equation.
Even if the relationship with the bank has ebbed and flowed, borrowers should not lose sight of the value of a track record. Whilst many business people believe that history with a bank doesn’t count anymore this is not necessarily so. Whilst history and reputations may not count for us much as they once did, it is far better to have a good history than not. On the other hand “bank hopping” in which a business moves from bank to bank often chasing often for small reductions in margin, can easily damage both parties because it does not allow for time to establish a track record which can help a bank make the best possible decisions. The strength of a banking relationship becomes apparent not in times of steady earnings and asset price growth but when the going gets tough. Being able to work with a bank through tough times does count for something and if a bank has this kind of history with a customer, it is more likely to be supportive during challenging times. Equally the converse also applies.
The exception to the “Love the One You’re With” rule is where the existing relationship has become so toxic that there is really no choice but to look elsewhere. But given that it is unlikely that any new bank will take on such a relationship, the borrower may have to restructure the arrangements in order to attract a new lender. This could involve reducing debt by selling assets or the injection of new capital or subordinated loan funds. Alternatively, the borrower may need to provide additional security to give the new bank comfort. Either way this process will be difficult and time consuming but if a banking relationship is irretrievably broken down, the sooner the borrowers begins the process of finding a new bank the better off they will be.
If the relationship has not irretrievably broken down but is less than ideal, the following steps may help a business to improve its standing with its current bank:
- The best way to get love returned from your bank is to perform and when you do perform, make sure you tell the bank.
- The best way to lose love from your bank is to fail to keep them informed. A poorly informed banker is a dangerous proposition although not quite as dangerous as a misinformed banker. So if you have news, good or bad, don’t hide it from your bank.
- Even if you are not accustomed to giving the bank bad news, understand that the banks receive bad news every day and it is more significant to you than it is to them. So if you do have bad news report it promptly, explain why it has occurred and most importantly present your plan for addressing the problem.
- Don’t ask for anything unless you really have to and when you do, make sure you are fully prepared with a business plan supported by three way profit & loss, cash flow and balance sheet forecasts.
About the author
Neil Slonim established Slonim Consulting in 2008 to help companies build better relationships with their banks. After 25 years in senior leadership roles with NAB he now leverages his experiences and connections to bridge the relationship gaps which exist between companies and their banks. Slonim Consulting has also achieved success for clients in family business counselling, resolution of partnership and creditor disputes, capital raisings, expert witness report and corporate governance.
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