I’ll leave it to the stock analysts to ponder whether Comerica paid too much (the deal is not accretive to earnings until 2013), but from a strategic perspective it is a good move:
- It leverages Comerica’s strengths. Sterling is primarily a business bank. That’s Comerica’s sweet spot, and it permits them to leverage their strong marketing and relationship management skills
- It is manageable in size and scale – Comerica is experienced at integrating banks of this size
- It improves Comerica’s distribution in key markets: their branch network in Houston will double, Dallas-Ft. Worth branches will increase 27%, and Comerica will gain entry to San Antonio (and Kerrville) where it does not have any branches
What does this mean for Texas banks?
It confirms that M&A is on the rise in 2011, and we should see many more opportunities for sellers and buyers
It creates opportunities in specific markets: 8 Sterling branches are in very close proximity to existing Comerica branches (less than a mile) and there will inevitably be some branch consolidation
It will create opportunities to target attractive customers. Risk management and pricing will convert to Comerica’s standards as soon as the deal closes, and this will mean changes in loan and deposit relationship management:
- Commercial loans: 69% of Sterling’s loans are real estate related (54% Commercial and 15% Consumer) – by comparison, 63% of Comerica’s Texas loans are C&I. Expect Comerica to reduce their exposure to real estate related loans, even those that are well performing. On the other hand, it will be a more formidable competitor in C&I.
- Deposit relationships: Sterling’s COF is 22 bp higher than Comerica’s and they are more dependent upon interest bearing accounts. Comerica may be less aggressive at maintaining deposit relationships that are price sensitive. On the other hand, the new entity will be more effective at acquiring non-interest bearing consumer and commercial deposits.
It will ultimately create a stronger competitor in Kerrville, but in the short run it will create opportunities to take share from Sterling, which is the market leader (29% share of deposits)
It will add another strong competitor to the highly competitive San Antonio market, as Comerica leverages its new distribution to build relationships.
No matter how effectively Comerica handles the conversion (and they are skilled at integrating banks like Sterling), there will be opportunities as personnel, products, pricing, risk management, and systems are integrated.
Comerica estimates that Sterling’s expenses will take a 35% haircut. Staff and customers may be nervous, unsure what this means to them – and willing to talk to a competitor just to hedge their bets. Some won’t be happy, no matter how well it is handled.
To take advantage of this opportunity it is important to have a plan. There will be a window of time when things are “unfrozen”, and represents the best time to recruit skilled staff and acquire strong new customer relationships. But the window will close: Comerica will work hard to identify and retain staff and customers. Once the full conversion occurs and uncertainty gives way to stability, the opportunity is lost.
Don’t assume that there will be disruption that works in your favor. It takes effort and discipline to capture profitable customers and top performing staff from a competitor that wants to keep them. Without a detailed plan, you risk missing the window of opportunity – and only capturing the customers and staff that Comerica was willing to lose.
I recently met with two banks that had very impressive sales results – opening nearly twice as many new accounts per branch as peers. But when looking further at their total program, account growth was no better than our benchmarked average. Simply put, high attrition offset most of the impressive sales gains.
It’s not how many new accounts you book, but how many you turn into long term profitable relationships.
Some thoughts to ponder:
- You need to pay as much attention to account retention as you do to customer acquisition. In the retail bank, retention programs often don’t get the attention and focus they deserve when compared to front end sales efforts, marketing acquisition programs, and the like.
- The impact is huge. Think about the effect on revenue, core deposit Cost of Funds, and marketing expense if you can simply retain a higher percentage of your customers.
- You need to know the numbers. What is a good acquisition and retention rate? How do your metrics compare to peers? How do they compare to top quartile performers?
- You need to know what the best practices are, and assess which ones have the highest impact for your organization. Improving sales process by correctly profiling customers and placing them in the right product for their needs? Ensuring structured on-boarding processes are implemented? Cross-selling “sticky” products? Implementing attrition prediction models, backed-up with targeted retention campaigns? Reducing problem incidence and increasing overall satisfaction rates?
In the end, account churn is very costly – but it is also relatively inexpensive to control. We can help — we have benchmarks, best practices, and proven results. Give us a call.
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Need expert help improving revenue from your consumer and business customers? Peak Performance Consulting Group has best practices and unique solutions, with a proven track record of success helping clients achieve industry leading results. Contact us
- our experts can help you unlock the key to additional profitability and efficiency.
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