Carl Ryden, CEO of PrecisionLender and frequent author here on the LenderPerformance blog gave a truly inspiring talk at the TEDx Conference hosted by the North Carolina School of Science and Mathematics last month. If you’re not familiar, TED is an organization devoted to discovering and sharing “ideas worth spreading”. We think this qualifies…
I was kayaking this weekend and as I headed out across the lake, the headwinds I was paddling into reminded me of many of the conversations I’ve been having with bankers lately about loan pricing. When kayaking, paddling harder into the wind is less important than maintaining a steady pace and keeping the boat pointed in the right direction. The progress seems slow at first, but you soon realize that you’re getting closer to your destination with every stroke. Continue reading
We’ve seen an uptick in stories lately about the trend toward relaxed standards and reduced pricing – particularly in Commerical and Industrial lending.
“…Nearly two-thirds of banks with assets of more than $20 billion say they have lowered pricing on loans to large and middle-market businesses in recent months, while nearly half of lenders reported relaxing loan conditions, up from 30% in January, according to the Federal Reserve’s latest survey of senior loan officers…”
Maintaining discipline around pricing, covenants, and credit standards continues to be the only “silver bullet” you can count on. Check out the entire article in American Banker – Low Yields, Loosening Terms Raise Risk for Banks. And, to quote one of my favorite TV shows… “Let’s be careful out there.”
We talk to a lot of banks that have used, or are still using spreadsheets to model their loan profitability. Aside from the fact that modeling alone is not enough, according to multiple studies nearly 90% of spreadsheets in the world today have significant errors.
“…Spreadsheets, even after careful development, contain errors in 1% or more of all formula cells…Despite this long-standing evidence, most corporations have paid little attention to the prospect of serious spreadsheet errors…”
“…One solution is to use a pricing model to make sure that you are at least being consistent and making informed pricing decisions. We have looked at a lot of these, and most of them either use faulty logic or are impossible for lenders to use in real time. We have found one, though that is excellent in both regards: PrecisionLender. We very rarely recommend specific vendors or products, but this is one exception. In fact, we now use it in our own bank…”
Shameless plug aside, we wholeheartedly agree. The world HAS changed, and banks that understand the real value of the loans they book (or don’t book) will thrive. Do yourself a favor and subscribe to the Asset Management Group blog for weekly insight from a community banker’s perspective.
Here’s an excerpt:
“…A more robust risk-rating-framework is the foundation from which banks can set prices to be adequately compensated for risk. A disciplined and objective methodology to set loan prices based on risk is a necessity. Many banks pay lip service to this requirement but too often cite the need to match the competition as a reason not to abide by it. To be effective, loan pricing should take into account the entire customer relationship, the loan loss provision and cost of risk, an equity allocation, the duration of the credit and its funding cost, and the risk rating of the credit. A secondary benefit to a disciplined approach to loan pricing based on objective factors is that it provides a solid defense from charges of unfair or discriminatory pricing in small business lending…”
We couldn’t agree more! If you are participating in the growth in Commercial and Industrial lending, you absolutely must ensure that you are pricing adequately for the risk associated with each specific loan AND each specific borrower. A one-size-fits-all approach to risk can spell disaster down the road. Check out the entire article when you have a few minutes… it’s definitely worth your time.
The ability to vary capital when pricing loans is one of the most powerful and essential functions within a loan pricing model. Many loan pricing vendors and banks with internally developed spreadsheets either gloss over this functionality or completely ignore it. Similar to the process for setting targets, varying capital by loan type and asset quality strongly influences the pricing necessary to meet return on equity (ROE) objectives. Most importantly, this gives management control over the composition and the quality of the resulting loan portfolio. Continue reading
The assumption that bogs down most banks is the cost to originate and service loans. Typically, your finance people identify all of the costs associated with originating and servicing the loans. The lenders argue about full cost versus incremental cost of making loans. And it goes on and on! My goal is to help put these costs in perspective and minimize the drama associated with this aspect of the process so that you can begin getting the benefits of a disciplined pricing process. Continue reading
I had the pleasure of speaking with Darren Negraeff at Finextra.com last month about the importance of relationship pricing. Darren asks some great questions, and I think you might find the article helpful if you’re struggling to capture the real value of your relationships… and more importantly, to consider that value while making loan pricing decisions.
If you haven’t already seen it, PrecisionLender Co-Founder, Carl Ryden wrote a great post last year… What is Relationship Pricing? Take a few minutes to read it. It will definitely be worth your time.
The development of a good set of assumptions is essential for effective loan pricing software. That said, this is the #1 place where bankers get bogged down. Two things typically happen. The process takes forever as the assumptions are researched and fine-tuned. And then almost invariably the lenders and the finance people endlessly debate how realistic the assumptions are. Typically, the finance people are great at identifying all of the costs associated with originating and servicing the loans. And, the lenders rightly point out that there is no way they could possibly compete if all of these costs are included. The drama usually escalates and the initiative gets off to a poor start or is shelved completely. My goal is to help you avoid all the potential pitfalls associated with the assumptions and get you up and running as quickly as possible. Continue reading