With slower economy, bankers boost marketing to stimulate business

Northwestern Financial Review, May 1-May 14, 2003 by Regan, Shawn

It's little wonder that banks have been finding it difficult to make loans and extend credit lines to their business clients. Customers are reluctant. Indeed, capital spending by business has been the economy's long-term sinkhole.

A key indicator of business spending is non-defense capital goods orders. Such orders were at $63 billion per month at the start of 2001. They sank 22 percent during 2001 to $49 billion that September. Since then, they have regained about one-third of the loss, attaining $54 billion in January.

This diminished business spending has been the product of a slow-growth economy and the excess capacity and weak balance sheets it produces. The prospects for capital spending improving very much anytime soon are poor given the loss of more than 2 million jobs in the last two years and the resultant slow down in consumer spending.

In this environment banks are cranking up their marketing campaigns to attract new business clients, and to maintain and expand their relationships with the business customers they already have.

The bankers view

Some business bankers concede that demand for their products and services has tapered off. "The loan requests are down," said Harold Westhues, president of Jefferson Bank of Missouri, with $375 million is assets in Jefferson City, Mo. "If business people have expansion plans, they're being quiet about them, waiting to see some reason to be more confident. The click downward started about 18 months ago, and it seems every six months it takes another click down. It's not gloom and doom, but it is much slower."

Other bankers say demand varies by industry. "Id characterize demand as being good, but not great," said David Blohm, president and CEO of American National Bank, with $121 million in assets in Appleton, Wis. "While retail seems to be holding up pretty well, paper companies have been struggling and are reluctant to make capital expenditures. Some light manufacturers aren't willing to take the risk of adding a machine, square footage or more people. Those decisions are being delayed. People are skittish. Uncertainty seems more prevalent than I can remember it being in a long time."

But still other bankers contend that the demand has slowed only a little. "We're not seeing that much of a slow down," said Sam Somerhalder, corporate banking manager at Great Western Bank, with $812 million in assets in Omaha, Neb. "While the real estate side is real soft right now, the commercial demand for operating lines and equipment notes is still going pretty good. It hasn't tapered off that much."

Getting the word out

All three bankers say they have increased their marketing efforts to reach their hesitant business customers. In addition to relying upon the kindness of clients to make referrals, the banks are mounting promotional campaigns that include print ads in newspapers and magazines, broadcast ads on television and radio, direct mail and telemarketing.

"There are several banks in Jefferson City, and we've all been aggressively marketing to our business community," Westhues said.

In addition to the standard assurances of superior customer service, the messages conveyed in these promotions feature fairly focused products. For instance, Jefferson Bank is touting BusinessLink, its Internet cash management service, while Great Western Bank emphasizes its fee-based receivables financing program and its wealth management division for executives' personal.financing needs.

At this stage, pricing strategies in the form of higher interest rates on deposits and/or lower rates on loans and credit lines - seem to be playing a minor role in the marketing mix. For instance, Somerhalder is taking a mid-market approach with loan rates.

"We are pricing very fairly, very competitively," he said. "We're not the lowest priced bank in town, but we're not the highest either."

Besides, says Westhues, only the socially challenged would think of asking for better. "Rates are so low now, that hasn't been an issue," he said. "With prime well below five percent, clients would have to be embarrassed to ask for less."

But Blohm is leading with comehither rates on deposits while keeping fees low. "We've always priced our deposits on the high end, and on the loan side we're mid-line to lower quartile," he said. "We haven't changed our service charges since we opened 10 years ago, so keeping our overhead minimal allows us to continue to be profitable."

The outlook

The bankers' expectations ranged from cautious to exuberant. "We'll expand our loan portfolio a little bit this year by aggressively seeking the good loans," Westhues said. "But with spreads so narrow, we are also trying to increase our fee income."

Blohm was happy to quantify his optimism. "We expect to grow our assets $15 million to $20 million [or 12 percent to 16 percent]," he said, "with loan growth being 80 to 90 percent of that [or a 13 percent to 19 percent increase over the $93.8 million in net loans and leases at the end of 2002]. Profitability will be similar to what we've earned in the past."