How Banks Achieve High Performance: Strategies and Metrics

Introduction

Following a wave of consolidations and deregulation during the 1990s, the banking industry has become increasingly competitive in recent years. Moreover, innovations in so-called e-banking have created demand for a wider range of banking services available through a number of delivery platforms. Banks can no longer afford to specialize in a narrow range of services, and they have been required to respond to marketplace forces in meaningful and timely ways in order to remain competitive. In this environment, identifying how banks achieve high performance has assumed new relevance and importance. This paper provides a review of relevant peer-reviewed and scholarly literature concerning these issues, followed by a summary of the research and its key findings.

Defining High Performance in Banking

Although definitions vary, Grasing suggests that performance is generally a measure of how successfully banks manage and structure time so that the impact of the banking work process has its most significant effects. More specific features of high-performance banks were examined in a study by DePrince, Ford, and Strickland, who cite the results of a series of seminal articles examining Federal Deposit Insurance Corporation (FDIC) call report data to identify the factors that characterize high-performance banks. This analysis was important, DePrince and his associates suggest, because "Everyone in the business knows banking has changed dramatically over the past 20 years. Size and number of institutions, types of products offered, and technological advances come readily to mind. But what is less well-known is if, and how, the methods have changed for being a high performance bank" (36).

Based on their analysis, DePrince et al. report that high-performance banks typically earned profitability through various channels at higher than industry averages by minimizing unfavorable trade-offs between asset yields and risks — generating increased interest and fee income on loans and investments while experiencing fewer losses on those assets. In addition, high-performance banks eliminated waste at every opportunity and controlled the cost of funds by collecting lower-cost funds compared to their average-performing industry counterparts (DePrince et al. 36).

Other factors that set high-performance banks apart included the ability to minimize personnel expense as well as other overhead costs such as lease and operating expenses (DePrince et al. 36). Rather than simply paying their personnel less, high-performance banks excelled at minimizing human resource costs by achieving more loans and deposits for each full-time employee compared to the industry average (DePrince et al. 36). According to DePrince and his colleagues, "As a result, the full-time high performance bank employees — on average — generated over 90% more net operating income than their less adept peers in other banks" (36).

The final factors identified by DePrince et al. were the ability to generate and retain more earnings than other banks each year and the ability to increase loans, assets, deposits, and equity faster than industry counterparts. This level of agility is essential to achieving high performance following deregulation and increasing competition from non-banking competitors. Suter emphasizes that "The pressure to create new sources of revenue is not merely a result of the fabled shift in consumers' attitudes from a saving to an investing mentality. The advent of commercial paper, money market mutual funds, and securitization have enabled non-bank institutions to progressively steal vital financial assets from banks for the past several decades. Top performing banks are those that have continually reinvented the banking business to boost performance in the face of growing incursions by nonbanks" (36). Following deregulation, Suter suggests that high-performance banks have more actively sought out alternative revenue-generation sources than their lower-performing counterparts. "Many of the top-performing institutions," Suter reports, "have successfully adapted their businesses to take advantage of fee-based sources. Others have adopted lending specialties to fuel asset and interest income growth while increasing efficiency" (36).

Works Cited

Bielski, Lauren. "Today's Elements Tomorrow's Branch: The Branch Was Supposed to Phase out. It Hasn't and May Never. What Will the Branch of the Future Feature? Self-Service and Collaboration." ABA Banking Journal 99.6 (2007): 55–57.

DePrince, Albert E., William F. Ford, and Thomas H. Strickland. "The New High Performers Stretch Their Lead." ABA Banking Journal 91.11 (1999): 36.

Donner, Suzanne, and Cathy Dudley. "Balancing Customer Contact and High-Tech Delivery." ABA Banking Journal 89.1 (1999): 18–20.

Grasing, Robert. "Branch Performance by the New Numbers." The Journal of Bank Cost & Management Accounting 16.3 (2003): 3–5.

Hanley, Claude A., Mark P. Suter, and Steve Cocheo. "Banking's Top Performers." ABA Banking Journal 89.7 (1999): 36–39.

Lenhoff, Alan. "ICBA 400: Top-performing Community Banks of 2008." Independent Banker 59.6 (June 2009): 28–29.

Pickering, C. J. "The Sweetest Spot." Independent Banker 51.12 (December 2001): 88–89.

Segerstrom, John R. "Why Banks Fail." ABA Banking Journal 81.6 (1999): 47–48.

Spinard, William F., and Mark P. Suter. "Banking's Top Performers: The Following 150 Banks Have the Best Five-Year Return on Assets in the Industry. They Do it with a Mix of Basics and Specialties." ABA Banking Journal 88.7 (1996): 34–36.

Suter, Mark P. "Banking's Top Performers." ABA Banking Journal 91.6 (1999): 36.