Bank Productivity Whats Happened Since 1998

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Bank ProductivityWhats Happened Since 1998?
11.17.03
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Background

• A 1998 paper entitled Bank Productivity
  Promises Unrealized examined the drivers of bank
  efficiency
• Surprisingly, efficiency gains over the previous
  four years were driven primarily by income growth
• Costs had actually increased as banks expanded
  branch networks and new distribution channels
• Tonight we will determine whether the last four
  years has shown a change in performance

1 Published in Creating Value in Financial
Services (2000 NYU Stern School of Business)
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Productivity programs of the 90s

• Process redesign
• Overhead value analysis
• Centralization
• Mergers acquisitions
• Strategic sourcing

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Bank mergers have slowed considerably
US Bank Mergers
Source SNL Database
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Bank Concentration
Source SNL Database
6
Average Bank Assets (top 120 banks)
1998
1994
2002
Source SNL Database
7
Change in Number of US Banks
8
U.S. Bank Branch Growth
9
Cost to Income Ratio
1998
1994
2002
Source SNL Database
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Normalized Cost to Income
1998
1994
2002
Source SNL Database
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C/I Improvement CAGR
33
26
23
18
Source SNL Database
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Bank Asset CAGR Map
12 Stalled 12 Under-performers 53
Out-performers 24 Latecomers
19 Stalled 19 Under-performers 17
Out-performers 45 Latecomers
14
48
8
30
22 Stalled 0 Under-performers 11
Out-performers 67 Latecomers
19 Stalled 42 Under-performers 31
Out-performers 8 Latecomers
Source SNL Database
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Whats driving C/I?
5.3
5.2
5.1
3.4
3.1
3.1
1994
1998
1994
1998
2002
2002
Costs/Assets
Income/Assets
Source Creating Value in Financial Services, Nov
1999 (Normalised Revenue Costs)
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Another gross industry measure indicates only
marginal improvement
Average Annual Increase in Labor Productivity,
1994-1998 and 1998-2002
25.3
24.1
19.3
12.8
10.4
6.8
-1.1
1.4
3.1
0.5
1.8
1.0
-0.5
0.6
Radio TV
Banks
Department Stores
Grocery Stores
Non-store retailers
Computer Peripherals
Electronics Appliance Stores
Source Bureau of Labor Statistics
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What happened between 1998-2002?

• Recession cost cutting (layoffs,
  projects deferred,
  reduced IT spend)
• Declining interest rates yielding
  improving margins
• Improved fee income from
  record-breaking refinancing
• Continued mergers/scale
• Channel migration

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What will happen in the future?
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Case Study Abbey Bank (UK)

• Position -- Abbey is the sixth largest bank in
  the UK (200 billion in assets) -- second
  largest provider of mortgages and savings in the
  UK
• Staff -- Abbey National employs 28,300 FTEs
• Customer Focus principally consumers and small
  businesses
• Service Channels all of the typical channels
  (750 Branches, 12 telephone centers, internet,
  3,000 ATMs, etc) and several retail partners such
  as Safeway, Costa Coffee and Homebase

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Cost to Income Ratio (2002)
Source 2002 Company Annual Reports
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Project approach
Timeline and Tasks
Timeline and Tasks
2 weeks
2 weeks
2 weeks
2 weeks
2 weeks
2 weeks
2 weeks
2 weeks
1. Initial Overview
2. Data Gathering /
3. Data Gathering /
1. Initial Overview
2. Data Gathering /
3. Data Gathering /
4. Analysis and
4. Analysis and
1. Initial Overview
2. Data Gathering /
4. Analysis and
3. Data Gathering /
1. Initial Overview
2. Data Gathering /
4. Analysis and
3. Data Gathering /
Analysis Phase II
Analysis Phase II
and Data Requests
Analysis Phase I
Recommendations
and Data Requests
Analysis Phase I
Recommendations
and Data Requests
Analysis Phase I
Analysis Phase II
and Data Requests
Analysis Phase I
Analysis Phase II
Recommendations
Recommendations

Conduct deep
-
dive

Conduct deep
-
dive

Develop Operational

Compile results

Develop Operational

Compile results

Conduct
operational

Conduct
operational
and follow
-
up data
and follow
-
up data
Baseline
Baseline
site
tours
site
tours

Conduct joint

Conduct joint
clarification
clarification

Conduct in
-
depth
meetings to review

Conduct in
-
depth
meetings to review

Develop high
-
level

Develop high
-
level
interviews
interviews
interviews with
results
interviews with
results
operational map
operational map

Compile data in

Compile data in
appropriate parties
appropriate parties

Develop
Operations

Develop
Operations

Meet key contacts

Meet key contacts
operational
flows
operational
flows
Strategy
and Plan
Strategy
and Plan

Review data received

Review data received

Review existing

Review existing

Meet with businesses

Meet with businesses
for clarification
for clarification
documentation
documentation
to understand
to understand

Develop initial

Develop initial
operational
operational

Submit
initial data

Submit
initial data
performance flash
performance flash
requirements
requirements
requests
requests
report
report
Deliver preliminary

Finalized Operational
Deliver preliminary

Finalized Operational
Operational Baseline
Baseline
Operational Baseline
Baseline

Operational Strategy

Operational Strategy
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Strategic cost positioning
Acceptable investment
Current Organization
Over time
Operating costs
Income
Target
Target
Target
Non-strategic/ dormant/closed products
Core products
New strategic products