Is small business banking the new cool for the financial fraternity?

Small business banking has long been a backwater. But things are heating up as the big banks’ rivalry to lure offshore talent demonstrates.

Financial Review, J
You know there’s something strange afoot when three of the country’s four big banks recruit the new bosses of their business banking divisions from offshore.
National Australia Bank confirmed the appointment of foreigners was more than a coincidence by announcing on Monday dual British-Canadian citizen Andrew Irvine will spearhead its important business and private banking division.

Small business banking is under intense scrutiny amid growing competition and fears of hefty coronavirus-linked losses.  Fairfax Media

Irvine previously worked at the Bank of Montreal, where he headed the bank’s Canadian business banking operations.

Irvine needn’t fear that coming from offshore will be an impediment in his new job. After all, his main competition is likely to come from the Commonwealth Bank’s Mike Vacy-Lyle, who hails from South Africa, and Westpac’s Guil Lima, who started his career at Citigroup in Brazil.

Vacy-Lyle, who started as the Commonwealth Bank’s new head of business and private banking earlier this year, previously ran FNB Commercial Banking,the commercial banking division of South Africa’s FirstRand Banking Group.

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Updated: Jun 30, 2020 – 7.29am. Data is 20 mins delayed.

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For his part, Lima, who started as Westpac’s new business banking boss late last year, had previously been HSBC’s group head of wealth management in Hong Kong.

It’s clear that this near-simultaneous move by three major banks to recruit offshore talent reflects the intense competitive pressures that are emerging in the small to medium-sized business banking world.

It’s an area where National Australia Bank has traditionally enjoyed the dominant position. But the Commonwealth Bank has made no secret of its ambition to grow its market share, and the other major banks are equally determined to either protect, or to expand, their own business banking franchises.

As NAB chief executive Ross McEwan told The Australian Financial Review last month, “Everybody wants our business bank – they want our colleagues and they want our customers.”

But McEwan is far from complacent. At a briefing earlier this month, he told staff there were still senior bankers who were at the bank when NAB was “at its greatest – 20 years ago.

“They will remember how good it was and, in my mind, lead our younger bankers to be great again.”

Overlooked arena

The fierce competition in the business banking arena means there’s much more focus on bringing in senior executives with a broader skill-set to run the banks’ small to medium-sized business banking operations

Because it has to be admitted that – with the possible exception of the NAB which has always made it more of a priority – the small business banking arms of the big banks have never exerted a magnetic attraction for talented, highly ambitious young people.

Traditionally, the best and brightest young recruits have headed straight to institutional banking, and the Treasury division. And that’s why many of the leading figures of the banking fraternity – NAB chairman Phil Chronican, Westpac chairman John McFarlane, ANZ boss Shayne Elliott – all have extensive experience in institutional banking.

Even before the pandemic, the big banks were nervous about the threat fintechs posed to their control of the small business banking market.

But the prestige of institutional banking began to wane around the time of the global financial crisis, as the major banks began to recognise the huge value of their large mortgage portfolios.

As retail banking grew in prestige, a number of talented bankers were attracted to the area from the banks’ institutional, or even the business banking divisions.

Indeed, the standard wisdom in banking is that no one can have serious aspirations to run one of the big four local banks unless they’ve shown their mettle by running a major retail banking operation.

Commonwealth Bank boss Matt Comyn, for instance, ran the bank’s retail operations for six years before he got the top job. And NAB chief McEwan also boasts an impressive retail banking pedigree, having run Commonwealth Bank’s retail banking, before heading off to run the British banking operations of the Royal Bank of Scotland. McEwan then spent six years at the helm of the British-taxpayers-owned bank.

In contrast, very few people who have spent their careers in the business banking divisions of the bank have risen to the top executive ranks.

(One notable exception is Angela Mentis, who has risen through the ranks of NAB’s business bank and now runs the Bank of New Zealand.)

But apart from Mentis, most people who work in business banking tend to stay in the area. It’s partly because they enjoy the working relationships that they develop with their small business customers.

Data and analytic skills a must

The trouble is that as competition intensifies, those running the banks’ small banking operations need to be much more than solid relationship bankers.

They need to have finely honed strategic skills so they can work out ways to either grow their market share, or protect the banks’ existing franchise. (Interestingly, Westpac’s Lima and NAB’s Irvine both worked at management consultancy McKinsey & Company.)

But, even more importantly, those running small business banking divisions need highly sophisticated data and analytic skills.

Even before the coronavirus pandemic, the country’s big banks were becoming increasingly nervous about the growing threat that fintechs posed to their control of the small to medium-sized business banking market.

This has always been a relatively protected part of the banks’ franchise, mainly because lending to small businesses is difficult.

Not only is the quality of financial information poor, but relatively small loan sizes mean it’s not economic for banks to devote huge amounts of time and resources to get a better picture of the firm’s financial position.

But a number of fintechs boast they have developed better risk models than the banks, because they are collecting a wider range of data.

They believe this data – which gives them a clearer and more instantaneous understanding of the borrower’s financial health – will enable them to price loans better than the established banks.

In response, the big banks are working hard to develop a sophisticated data analytic capability that will enable them to fend off competition from the fintechs.

Of course, the ability to use data to gauge the health of their small to medium-sized business customers has become much more urgent in the wake of the coronavirus pandemic.

The major banks are confident the losses in their mortgage book as a result of the pandemic will be relatively minor. It’s their business banking books where they’re more vulnerable.

Banks are acutely aware their ability to limit the losses will depend on their ability to quickly detect which business customers have suffered most heavily from a collapse in cash flows.

This early detection means banks can contact struggling business clients to discuss a way to work through their problems, rather than waiting for them to call up and confess they’re facing severe financial difficulties.

There is, of course, another reason why three of the country’s big four banks are bringing in fresh talent to their executive ranks.

Although Westpac chief executive Peter King, along with NAB’s McEwan and CBA’s Comyn are all relatively recent appointments, their boards will already be starting to think about succession planning.

And that means they’ll be under pressure to make sure that they have a few people who will eventually be candidates for the top job.

The author owns shares in the major banks.