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Lending & Credit Risk

Know Your Competition: Best Practices for Using Peer Bank Data

Abrigo
September 8, 2016
Read Time: 0 min

Why analyze peer institutions?

A peer analysis – where a bank compares its performance to that of similar institutions - equips bankers to think strategically about a bank’s current position in its competitive environment and to consider its current progress toward a strategic plan.

Strategic planning for a bank’s future generally encompasses creating a “SWOT” analysis to identify current strengths, weaknesses, opportunities, and threats. Such an analysis gives bankers the opportunity to analyze internal and external factors that impact the bank or credit union. Using peer data is an efficient and effective way to identify strengths and weaknesses for this analysis.

A peer analysis can be very helpful in a myriad of ways. Specifically, for:

  1. Tracking the performance of a financial institution over time
  2. Creating goals for an institution relative to its competition
  3. Seeing what banks at the "next level" are doing and the numbers a given bank must achieve to reach that level
  4. Tracking market share when planning to open new branches and deciding where those branches should be located
  5. Benchmarking executive pay

What is a peer institution?

A peer bank is more than just a like-sized institution. In fact, how to determine an appropriate set of peer banks depends on what is being analyzed. Peers should be defined differently for each of these three purposes:

  1. Strategic analysis and performance tracking (points 1-3 above)
  2. Market analysis (point 4 above)
  3. Compensation benchmarking (point 5 above)

Defining peers for strategic analysis and performance tracking

Strategic analysis and performance tracking can be performed jointly because in both cases it’s appropriate to create and use a group of strategic peers and then track their performance until it makes sense to reassess and redefine the peer group.

When selecting peers, limit the number of peers to 10-20 in order to ensure a manageable and meaningful analysis. Because market consolidation is common, it may be smart to err on the side of larger peer groups that will remain meaningful in size. When selecting peers, include some banks that are smaller and some that are larger by total assets to allow for a broad view of the competition. However, the size of peer banks should still fall into the same general size category to avoid comparing against significantly larger or smaller institutions.

Asset size and geography are often the first criteria used to define a peer group, but there are a number of other important factors to consider when comparing performance. Also, consider banks that are similar to the institution according to the following dimensions:

  • Capital adequacy
  • Asset quality
  • Profitability
  • Liquidity
  • Loan mix and deposit mix
  • Sensitivity to interest rate risk and market risk
Of course, if any of these dimensions are performance areas you’d like to analyze more closely, don’t limit your peer group too narrowly. For example, if you’re looking to get a sense of how your bank compares to all other banks of a similar size on asset quality, it would be best not to limit your peer group based on asset-quality related attributes such as Nonperforming Loans.

Analyzing market competitors

The first step in analyzing market competitors is defining the geographic market to analyze. Once the market is defined - usually by identifying specific zip codes, Census Tracts or block groups - all banks and credit unions in that market should be identified as the market competition, unless there are known institutions that do not provide competing services. Generally, it is helpful to note all of the surrounding banks in the area when performing an analysis of the local competition.
 
Once the market is identified, the next step is to apply the demographic or market data of interest such as population demographics of a geographical area including average age, income or educational attainment. Additional data such as the market share of the banks and credit unions located in that market or data on home prices or household debt can help create a fuller picture of the market and what opportunities there are for an institution in that area.

 

 

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Peer groups for executive compensation studies

One particularly valuable use of peer data is evaluating and setting executive compensation. There are a number of people who want information on bank executive compensation such as the SEC, the ISS (Institution of Shareholder Services) and the press, to name a few. In addition to bank boards of directors, which set compensation for incoming executives, these groups all maintain a strong interest in peer group selection.

The key when creating a peer group for executive compensation studies is that the size of a bank matters. As shown in the graph below, a bank's asset size is strongly correlated with its CEO’s total yearly cash compensation.

Size of bank matters with executive compensation

As the bank grows, so does the executive-level pay. As a result, a peer group for these purposes should be homogenous and of very similar size to provide a competitive benchmark. Peer groups may need to be reevaluated each year to determine if they are still relevant.

About the Author

Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo’s platform centralizes the institution’s data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth. Make Big Things Happen.

Full Bio

About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

Make Big Things Happen.