A small number of U.S. banks (11%) are currently well-positioned to adopt growth activities, according to a comprehensive business designation study from The ROIG Group, a specialized consultancy with a relentless focus on executable, customer-centred outcomes. Inversely, the research found that most banks (89%) should be focused on other challenges to drive value.

The ROIG Group examined 397 U.S.-based publicly traded banks using 2021 data, including net interest income and non-interest income, efficiency ratio, equity capital, the cost of equity capital, and market value amongst others. ROIG assessed both the historical and future implied performance of each bank in order to classify each bank into one of four designations based on the results-- Revive, Optimize, Incubate or Grow. Banks that earned a “Grow” designation are in the best position to evaluate acquisitions, explore product or service diversification, or pursue customer, channel, or market innovation choices.

“Most executives are wired to grow, resulting in too many companies being hyper-focused on growth activities, such as product and service expansion, growth through acquisitions, attracting new customers, expanding channels, and diversifying product and service offerings through new capabilities, when they are not ready to successfully execute. The customer or top-line revenue and bottom-line or profitability challenges vary widely based on the company’s designation. Getting the strategic direction right really matters and getting it wrong can be disastrous,” said Rob Willey, Managing Partner at The ROIG Group.

The ROIG Group research uncovered the following about banks and their designations:

• Thirty-three per cent (33%) of banks fell into the Revive designation. These banks do not deliver profits in excess of their cost of equity capital and may even face liquidity challenges. The relationship with their best customers is fractured. Revive banks must prioritize their efforts on fixing what is broken, pruning non-customer-facing expenses and underperforming assets, and improving the earning asset mix. CEOs must be prepared to place large bets to turn the company around.
• Fifty-six per cent (56%) of banks fell into the Optimize designation. This group of banks is profitable today but the market believes they will be worth materially less in the future. Some banks may be haemorrhaging customers while other banks are actually growing. Optimize banks need to invest in improving the customer experience on one side while optimizing expenses and assets on the other. Streamlining is the mantra. It is difficult, but not impossible, to “restart growth” again. Growth efforts outside of existing capabilities should be scrutinized. Acquisitions need to be carefully vetted – there is no room for error.
• Eleven per cent (11%) of banks fell into the Grow designation. Most banks with a Grow designation are not only profitable today but the market believes they will be more profitable in the future. The challenge for these companies is to make sure the 5-year business plan contemplates the right mix of growth. The type of growth innovation available includes product and service expansion, product and service diversification, acquisitions, and exploring new customer markets and channels.

This designation research has emerged just in time to help answer a highly debated question: will banks be able to keep up with fintechs in the payments race? Banks have many inherent strengths to be competitive in the payments race but they must understand their designation and create a strategy that helps them pursue the right path forward. The ROIG Group’s Payments and Financial Services Practice Lead Sheree Thornsberry explains:

“Banks are jumping into payments innovation out of fear of ‘losing the race’ to fintechs, but how banks expand or diversify their presence in payments or make decisions to build, buy or partner are often more complicated than anticipated. They can be taken by surprise when they realize what they are trying to build does not fit with the structure, designation, or capabilities of their organization. What a bank should work on, and more importantly, how they should approach the work is materially different depending on the designation.”