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Digging deeper: Mining for insights with peer analysis

Joseph Lowe
Posted by Joseph Lowe
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For small businesses, planning a strategy around identifying and combating competitors is a must. After all, it’s impossible to gauge performance without comparative metrics. For example, a flower shop owner might ask herself:

Is the flower market saturated within the local area?

What is competitive pricing for roses around me?

How close is my storefront to the competition?

The same methodology applies to community banks and credit unions. Small financial institutions know this, often vying for the latest FDIC data or OCC report to gain a leg up on the competition. It’s also not uncommon for banks and credit unions to perform a strength, weakness, opportunity and threat (SWOT) analysis of peer data, exploring internal and external opportunities for improvement, as well as areas where a financial institution thrives against its competition. This competitive analysis can serve as a measuring stick to gauge one financial institution against its peers. 

Though, during peer data analysis, there are critical questions that banks should ask to provide valuable insight, such as:

Are we paying attention to the correct metrics and competition?

Are our goals clear and concise?

How do we compare to the local and national banking environment?

With access to the correct peer data, answering each of these questions can be achieved with a thorough analysis.

Identify the competition

Just because Bank of America or BB&T have locations next door doesn’t mean those branches are your competition. Sometimes it’s the community bank with a similar asset size that should be watched carefully, but even though asset size should be noted, community banks have to move beyond common characteristics if they wish to accurately define their competition.

Identifying the competition, first and foremost, begins within the institution. Understanding the bank’s primary goals and its corresponding key performance indicators (KPIs) – whether it’s focusing on deposit products or growing commercial loans –  allow the bank to measure itself against its true competitors in the space. Peer groups should be built based on the unique metrics your institution cares most about. Banks can tap technology to analyze loan portfolio concentrations within other institutions or better analyze metrics such as return on assets, efficiency ratio, yield on earning assets, or net interest margin. During peer analysis, it’s considered best practice to include a range of banks that perform worse and better than your institution for chosen KPIs to benchmark competition.

Identify strengths and weaknesses compared to peers

In a regulated competition – like an NFL game, for example – strategizing a gameplan is futile without understanding what your team excels at and areas where improvement is necessary. Banking is no different.

No bank or credit union is the same, meaning each financial institution must uncover holes in the portfolio that are unique to their institution to be best prepared for shifts in the banking industry. A peer analysis tool grants banks access to the insights that point out financial institutions’ weaknesses so they can be remedied quickly.

An example of this could be CDE Credit Union. While CDE has seen over 40 percent loan growth year over year, bank executives are poking holes in the portfolio to complete end-of-year planning. CDE Credit Union uses peer benchmarking technology to measure itself up against its two community bank peers down the road – DEF Community Bank and First Town Community Bank – and benchmark its performance. To their surprise, despite high YOY loan growth, the bank’s concentration of commercial real estate (CRE) loans has decreased since last year. To better access the situation and cross out the notion this is circumstantial, the executives check more peer data of banks around the county and a few more across the state only to realize it’s not a trend. With this data in mind, CDE Credit Union decides it will focus on CRE loans and check data again in the coming months to gauge the market and set future goals.

Set goals based on measurable benchmarks

Once you’ve identified the KPIs that matter most to your institution, it’s time to set clear benchmarks to strive for based on your competition’s performance metrics. In a BankNews article, Larry N Laminger, banking consultant, stated these benchmarks will not only serve as a method to measure overall performance, but it’s used to, “achieve higher levels of strategic, operational and financial performance.” Each benchmark can serve as a guiding light as banks plan future initiatives.

Setting a clear goal involves two main components: A KPI and a timeline to reach it. It’s important to be aggressive, yet realistic, when determining the appropriate timeline for your benchmarking goals. Is the KPI improvement achievable after one quarter or will it take the entire year to reach?

Perhaps your financial institution is in the bottom 20 percent for return on assets and you’re hoping to improve throughout 2019. After running a peer analysis, you recognize that there is a heavy correlation between the efficiency ratio and return on assets – as noted by Laminger – and decide that your institution should aim to lower the efficiency ratio to top that of the competition. In order to do so, your financial institution must decrease the ratio, which might take up to two years. In this case, your measurable goal might state: In order to increase the institution’s return on assets, by the end of 2020, the bank will lower the efficiency ratio by 4 percent.

When community banks and credit unions revisit their strategies throughout next year, a peer benchmarking tool can be a valuable resource. As the local and national banking environment shifts, small banks and credit unions should go back and identify new competitors in the space, consistently assess benchmarks and improve existing lending and marketing strategies by analyzing peer data.

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tags: analysis, peer analysis, peer comparison