Capital: The Mother's Milk of Banking

Maximize shareholder value! This is the battle cry being sounded in the lobbies and boardrooms of banks everywhere. This is understandable due to the importance placed upon earnings by existing and potential shareholders, as well as banking regulators.

If in truth capital is the Mother's Milk of the industry, then it is fitting that closer attention be paid to the source of that milk, the shareholder. This is not to say that bankers have, in the past, totally ignored the wellbeing of their shareholders. However, given today's economic and social climate, it is more important than ever to ensure that present and potential shareholders recognize the opportunities of investing in a commercial bank. This is critical because banks must have a strong capital base in order to effectively compete in today's competitive marketplace.

How best can a bank (or any other publicly held company) craft a strategy that will enhance the investment opportunity and make ownership attractive? The methodology to accomplish this task continues to be examined and discussed by those within and outside the industry. The one point upon which most observers agree is that retained earnings increase capital, fund dividends, and command an investor's attention. Then the question becomes, what is the source of these retained earnings, and how can they be increased? The primary source, of course, is the customer…a satisfied customer that is. And the best way to build an inventory of satisfied customers, is the old fashioned way, "one customer at a time."

Can there really be such a simple solution to such a complex problem? Yes, because an increase in customer satisfaction directly increases customer revenue, which increases profitability, this then in turn increases shareholder value. A recent survey conducted by Citibank reveals that a satisfied customer, on the average, produces 50% more direct business than does a less satisfied customer. This makes it clear how important and sensitive the customer satisfaction margin is to bank profitability. Is this a new revelation? No, the business community has possessed this knowledge for some time. However, while there is a great deal of conversation about customer satisfaction within financial institutions, many banks seem to have difficulty applying it successfully. Maybe the approach is just too simple to be taken seriously.

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