Revisions to 2022 Annual Reports in Banking Part 1

When banks prepared 2022 annual reports, the rate environment was much different from today. As The Federal Reserve raised rates, the impacts resulted in fewer businesses seeking financing. To adjust for the wild year that was 2022, this year’s annual reports will contain stark revisions to adjust for the times, as well as progress on customer-first initiatives.

Having perused more than 100 annual reports from 2022 the most common commercial banking themes included:

1. Differentiation through client experience
2. Sustained growth
3. Environmental, Social, Governance (ESG)
4. Automation for faster decisioning

Leaders will take careful inventory as they plan for 2023 and be forced to think deeply about the importance of nascent and legacy strategies that will either require revisions or progressions in the new year.

Based on The Fed’s Senior Loan Officer Opinion Survey, bank sector research, industry leaders and bank earnings calls, in addition to IBISWorld’s partnerships with more than 500 North American banks, these are the potential progressions and revisions:

Progress: Differentiation through client experience

In an age of universally accessible information, knowing your customer isn’t the exception anymore; it’s the standard.

In 2023, this trend will progress as business customers express their needs to be supported by their banking partners. Many small and mid-sized businesses don’t employ a board of directors or Chief Financial Officer, which makes guidance from their banker a crucial part of the company’s success.

Barlow Research highlighted in a September 2022 survey that the number two reason a customer considers switching to a soliciting bank is the incumbent bank’s lack of knowledge about the customer’s business or industry. The top reason, Barlow explains, to explore a soliciting bank is better rates and terms. Still, without much room for flexibility, many banks will focus on customer knowledge as a defensive tactic.

Barlow continues that 82.0% of middle market companies are being called on by at least one soliciting bank, with 40.0% being contacted by five or more institutions. With this in mind, anticipate a year of progress in customer knowledge as customers of all sizes seek out banking partners offering a consultative approach to their business's unique challenges and opportunities.

Revision: Sustained growth

The Fed’s Senior Loan Officer Survey from January 2022 began, “Over the fourth quarter, banks reported having eased standards and terms on C&I loans to firms of all sizes,” and by October 2022, pivoted 180 degrees to “…banks reported having tightened standards on C&I loans to firms of all sizes…tightened standards or terms cited a less favorable or more uncertain economic outlook, a reduced tolerance for risk, and the worsening of industry-specific problems as important reasons for doing so.”

2023 is bound to be a year of careful decisioning, and will require a lock-step approach from front office to the back.

As SouthState Bank’s Director of Capital Markets, Chris Nichols, explains in his recent 5 New Year’s Resolutions For Any Sized Bank That You Must Get Right in 2023, “If you look back over any recession, it is the two years prior when banks make 80% of their lending mistakes. Now is that period.”  

While it never makes business sense to bring lending to a grinding halt, it is worth examining each opportunity for near-term threats.

These times are too volatile to forecast similar growth, so the importance of existing relationships and doing everything possible to retain and grow that business will remain a top priority; fostering net new relationships will become less of a priority.

Despite this, banks may be able to win brand new customers based on a strong knowledge of a wide range of industries.

To begin 2023, anticipate less demand for loans, paired with a stricter credit policy.

However, banks have a stronger capital position than in previous recessions, so this strategy may require yet another revision mid-year as banks are permitted to allocate more capital to new loans.

Progress: Environmental, Social, Governance (ESG)

Financial services company Morningstar reported that 90.0% of companies either have or are developing a formal strategy on Environmental, Social, and Governance (ESG) in 2023. While on the consumer side, Stanford Business reported the rising importance of ESG by generation, with Millennials “out-caring” Baby Boomers more than two to one on the matter.

ESG has taken several steps forward since the concept burst onto the North American banking scene in 2020, and will continue to do so in 2023.

With the foregone conclusion that certain related disclosures will soon be part of the process, banks have begun to formally prepare an infrastructure with dedicated departments, focused lending initiatives and specialized credit standards.

In earnings discussions, banks will continue to focus on opportunities to work with environmentally-conscious organizations. Banks are also evaluating commercial portfolios for riskier loans based on their customers' long-term sustainability goals and those businesses’ exposures to environmental risks.

In a recent Industry Insider article, Kelsi Cleary-Hammarstedt covered ATB Financial and Business Development Bank of Canada’s strategies; with a growing opportunity to uplift these businesses through responsible social lending, expect continued investment into these initiatives.

As banks wait with bated breath on ESG regulations, expect 2023 to be a year of continued preparation. Loan demand will be lower and credit standards will be stricter, so forward-thinking banks may begin to reshape the concentrations in the portfolio.

Looking back at the pivot to more intentional credit decisions, banks will have the opportunity to be more deliberate in the loans they write in 2023, and ESG may play a role in those decisions.

Progress: Automation for faster decisioning 

Banking aside, the world is moving faster than ever before. While many businesses have the liberty to focus most of their energy on moving fast to scoop up market share, banks need to split resources between being fast and precise.

A recent concept to grace finance is “to the moon,” in reference to businesses being so successful that they’ll be able to fund a mission to space.

On that moon mission, precision will take precedence over speed, as a miscalculation of just one-degree would send you over 4,000 miles off course. To avoid mishaps, all groups on the mission will need to work in unison without any lapse in communication from takeoff to landing. Risks will need to be identified, mitigated and planned for; opportunities will need to be uncovered and capitalized upon.

Back to banking, this same precision is becoming an expectation of customers. Banks are investing heavily into technologies that connect internal processes for faster decisions, especially inter-departmental decisions such as the quality of a new loan request.

Loan origination systems (LOS) have grown in popularity, as have APIs from third-party platforms to integrate seamlessly into internal dashboards and CRMs. Bankers have seen tangible benefits to meeting preparation from having client and industry metrics on the CRM account page.

Once bankers identify a credit opportunity, LOS systems can sync departments and pass crucial pre-screening information to the assigned analyst. Once on the analyst’s desk, credit teams can auto-fill essential scoring metrics to determine the bankability of the customer and their financial standing regarding the bank’s risk appetite.

Then, through the life of the loan, portfolio oversight can be conducted in real-time to identify mounting risks across unique concentration pools, rather than manual monthly or quarterly reports that require valuable time to compile and are published with a natural lag time.