Friday, April 18, 2014

Lending Club Raises Big Bucks and Vaults to $3.8 Billion Market Cap.

A New Bubble or are Banks in Deep Trouble?


Don’t let all the bank earnings reports distract you from the really big news this week for U.S. banks.

As reported in the Wall Street Journal April 17th, Lending Club announced that it raised $115 million in new capital to fund its meteoric growth.   For those too busy to see over the horizon, Lending Club is a peer-to-peer lender determined, in the words of their founder, to “transform the entire banking industry.”

They and their competitors remind me of Capital One and MBNA back in 1990 when a new generation of niche credit card firms launched.  Back then bank competitors pooh-poohed these “specialty” players as too small to matter.  Over a 15-year period, these itty-bitty credit card niche players grabbed enormous market share and pushed complacent bankers out of the card business.

Could the same thing be happening before our very eyes with peer-to-peer lending.  Apparently some smart investors (Blackrock, T. Rowe Price, and Wellington Management) think so, having invested in Lending Club.  Based on the equity raise, according to the Financial Times and Wall Street Journal, Lending Club today is valued at roughly $3.8 billion.

How impressive is that number?  Consider this: Lending Club’s market cap is greater than First Niagara and Synovus Financial, both of which are among the 50 biggest bank holding companies in the U.S.

And for further perspective, over the past 12 months Lending Club booked $2 billion in loans.  That’s less than 1/10th the total asset size of one of America’s best-run banks, Kansas City-based Commerce Bank. Yet the 148 year-old Commerce Bank has a market cap today a mere 10% higher than Lending Club.

So here’s the question: Is Lending Club a 2014 version of a dot-com bubble?  Or is it a 10X Risk that threatens the future of bank lending?  Stay tuned.


Written by Richard J. Parsons

Broke: America's Banking System
Richard J. Parsons is the author of “Broke: America’s Banking System”. He is a frequent contributor to the American Banker and a member of the Editorial Advisory Board of the RMA (Risk Management Association) Journal. Rick can be reached through RJParsonsGroup.com, Facebook, Twitter and LinkedIn.

Wednesday, April 16, 2014

Are Banks Over-Reaching For Loan Growth?

Banks That Grow Too Fast Hurt The System



I’ve been keeping a close eye on JPMorgan Chase lately because they appear to be in bunker mode, meaning they are storing up tons of cash (more on that latter) and proving to be tight-fisted lenders, especially in Commercial and Industrial (C&I) lending. With a loan to deposit ratio of 56% and sharp words of caution about competitor lending practices, I am beginning to think JPM sees the End Times near.
If JPM is worried, should bankers and bank investors worry too?
In my book I coined the term, “10X Risk”, to describe bone-headed mistakes that kill banks or destroy massive shareholder value. My in-depth research of bank failures reveals that the most common 10X Risk occurs when over-confident management and directors reach for loan growth.
Banks that grow fast are either smarter than the average banker (they always think that), built a new mousetrap (maybe, but it takes about two weeks for competitors to replicate), or just down-right daredevils (most likely).
When the industry grows much faster than the growth rate of GDP (1.9% in 2013 and 2.9% over the past 30 years), history shows there is an eventual reversion to the mean.Sometimes, as we saw in the mid-1980s and more recently starting in 2008, the reversion can be violent, leading to hundreds of bank failures.
C&I is a bread-and-butter loan category for commercial banks. The CEOs of the vast majority of banks grew up doing C&I lending. Since C&I is so crucial to U.S. bank profits, I took special notice of this comment made on the April 11 Analyst Call by Marianne Lake, JPM's Chief Finance Officer:
"We are seeing the ongoing aggressive investing environment on both credit terms and pricing, we will do every rational and sensible deal we can do but we are not going to chase growth at the expense of discipline.”
For those readers unaccustomed to banker talk, “aggressive” is code-word for "dumb." Lake is saying that there are some bankers so desperate to improve earnings (and their stock prices…and their bonuses?) that they are making loans they shouldn't.
Is she right?
I just returned from a conference where I spoke about the future of U.S. banking with bank risk executives from four states. In my conversations with these bankers I heard three messages consistent with what I am hearing from bankers across the country:
  1. C&I loan growth is one of their bank’s top goals for 2014.
  2. C&I loan demand is sluggish.
  3. Pricing on C&I loans is getting cut to the bone and loan structures are becoming more liberal.
In the lemming-like world of U.S. banking, it’s safe to say that C&I lending is the “next hot thing” for bankers. The good news is that there are plenty of banks out there with long-tenured, seasoned bankers at the helm who have seen this movie before and they don’t plan to buy a ticket to see it again.
On the other hand, if Marianne Lake is right, apparently there are some bankers and directors unfamiliar with this horror show.
I am curious: Are banks starting to take short-cuts again? If so, which ones are you worried about?
In the meantime, I am digging into C&I loan growth data across the industry. Stay tuned.


Written by Richard J. Parsons
Broke: America's Banking System

Richard J. Parsons is an Author, Speaker, Educator and Business Advisor in the Financial Services industry.  After a 31 year career at Bank of America, Rick founded the RJ Parsons Group in 2012. Rick published his first book in 2013, "Broke: America's Banking System - Common Sense Ideas to Fix Banking in America." He can be reached through his website rjparsonsgroup.com or via social media including @RJParsonsGroup and LinkedIn.

Wednesday, April 09, 2014

Enterprise Risk Management Requires Capable Operational Risk Management

People, Processes, Systems and Tools Ultimately Determine a Bank's Safety and Soundness 

A robust enterprise-wide system for managing bank risk is built on a strong foundation.  The strong foundation is comprised of four parts: People, Processes, Systems, and Tools to analyze external risks to the bank.  

The slide above is a picture of how bank directors and management should think about how to construct a strong Enterprise Risk Management system. At the top are banking’s 7 risk disciplines.  Each requires skilled bank experts.  In the middle is Enterprise Risk Management which is “owned” by the bank’s chief risk officer and CEO.  At the bottom are the four components of Operational Risk Management (ORM) which is the principal responsibility of bank directors in their exercise of effective governance.

Only a few banks in the United States have chosen to populate their boards with directors who are deep subject matter experts in such bank risk disciplines as credit, liquidity, compliance, or interest rates. Though there is evidence more banks are adding banking experts to their boards, the reality is that most banks lack such experts.  The principal reason few banks, especially community banks, have gone in this direction is because there is a shortage of people in the U.S. qualified as experts in these seven disciplines.  Another reason banks have not appointed such directors is because of a fear that highly skilled experts in the seven risk disciplines may struggle with role clarity.  Specifically, bank CEOs worry that directors who are deep subject experts in banking may start managing the bank versus governing it.  

However, as many bank boards learned during the Financial Crisis, the absence of deep subject expertise on the board does not relieve bank directors of the responsibility to evaluate the effectiveness of management’s skills and the bank’s processes used to manage the bank’s risks.  As this slide depicts, effective enterprise risk management is built on bedrock of skilled people using capable processes and systems.  Directors of all banks must be able to determine if their bank has capable PEOPLE who use capable PROCESSES and SYSTEMS to ensure the bank is effectively analyzing and responding to EXTERNAL EVENTS that threaten the bank’s safety and soundness. 

Written by Richard J. Parsons
Broke: America's Banking System

Richard J. Parsons is an Author, Speaker, Educator and Business Advisor in the Financial Services industry.  After a 31 year career at Bank of America, Rick founded the RJ Parsons Group in 2012. Rick published his first book in 2013, "Broke: America's Banking System - Common Sense Ideas to Fix Banking in America." He can be reached through his website rjparsonsgroup.com or via social media including @RJParsonsGroup and LinkedIn.