Inside Your Banker’s Head

Companies are starting to figure out how their banks make money. Banks actually like that.

Nor was the reputation of RAROC helped when some banks simply stopped lending to certain companies — even whole industries — based on their risk profiles. “We actually had a lead bank drop us in 2000,” recalls Jeff Burchill, CFO of commercial property insurer FM Global. “They decided to drop all insurance companies because they didn’t like the risk profile.”

“Up until this time, banks and companies have had a combative relationship,” observes Studer. Indeed, banks have had reason to complain as well. Corporate customers, after all, didn’t hesitate to tie their banking business to demands for credit. And they rarely showed any understanding of their bankers’ needs. “Clients used to haul out a spreadsheet listing all their banks in descending order of credit commitment and noncredit fees,” says Bradley A. Hardy, senior vice president of corporate banking at Wells Fargo Bank N.A. “But they were only looking at the revenue line; they were not looking at profit at all. You can imagine profitability in an M&A transaction is vastly different than a cash-management business.”

Show Me the Model

Increasingly, however, RAROC-style return models are contributing to improved corporate banking relationships. “Corporates are getting more sophisticated,” says Studer. Bankers agree. “Clients are developing a better understanding and appreciation for the return models that we use,” notes George Calfo, head of Citigroup’s national corporate bank. “We think that’s positive.”

Of course, the degree to which companies actually understand their bankers’ returns still varies widely. “Some clients are very analytical, some are more feel-oriented,” says Calfo. Most probably fall into the latter category, relying on conversations with their bankers and a basic understanding of how business is allocated. Indeed, 31 percent of respondents to a survey by CFO (see “Last Banks Standing“) said they rely on their banker to tell them how the bank values their relationship.

“We don’t have a model that tells us how profitable each business is [for our bankers],” says Jack Wagner, assistant treasurer at Cabot Corp. “But each bank has a different appetite for each type of business, so we do try to accommodate them.”

Sealed Air Corp. takes a similar approach. “We do not maintain a score card that shows how revenues and perceived profitability are getting allocated among the bank group,” says CFO David Kelsey. “We do make an effort to treat these institutions fairly and have them feel that when a transaction comes up, they will have a seat at the table because of their participation in our global credit facility.”

A small but growing number of companies, however, are seeking ways to quantify just how effectively they allocate that business. “We do a lot of measuring of fees,” notes FM Global’s Burchill, echoing 11 percent of survey respondents who said they calculate the revenue that each bank earns on all transactions with the company.


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