The Bank ABL Conundrum: Why Do Banks Fail to Sell this Excellent Product?
An increasing number of commercial banks are creating ABL divisions. Yet, as Charlie Perer muses, these divisions are still playing second fiddle to C&I and not receiving referrals from their C&I colleagues, even when ABL might be a more appropriate product and not utilizing it will cause a client to exit. He explains that breaking down the silos between divisions will serve customers more effectively and keep them as clients.
Is bank ABL the most undersold bank product?
This is the question many of the nation’s leading banking executives are asking themselves, and the answer is “yes!” The reason is simple — ABL is a hard sell in an “ABL light” world, and many banks have not functionally integrated ABL with C&I. All major and regional banks have their playbooks for retail banking — deposits and services — and large corporate services — access to banks’ balance sheets and Wall Street.
However, the C&I loans market is already competitively targeting middle market companies, typically defined as between $50 million to $250 million in revenue and $10 million to $200 million in facility size.
Direct marketing easily reaches retail-driven clients. The credit policy remains FICO-based, as it has for many years. Large corporations are served by teams from the major money center regions, but middle market businesses are widely spread throughout the country and need to be serviced by regional commercial banking teams. For every GM and Boeing, there are 10,000 companies that comprise the supply chain for those conglomerates, and these companies have middle market banking needs.
An Underserved Market
Acquiring and servicing these middle market companies as clients has also proven to be challenging, as well as competitive. This asset segment continues to be the hardest and most complex to holistically solve. Non-sponsored middle market companies continue to be underserved by lenders, and ABL is at the crux of it. Most banks continually under-or-poorly sell ABL, and it’s typically no fault of the banks’ ABL groups — just ask them.
A bank ABL group’s best referrals usually come from its own commercial bankers. So, the ABL group is sometimes only as good as its commercial banking partners. Try attending a strategy meeting at the nation’s largest banks when you have thousands of middle market bankers in every major city in the country. Do these folks know the ABL product? Do they know how to sell it? Is compensation aligned for both groups? These sound like easy questions to answer, but this writer can assure you, they are not. This writer travels the country and asks these questions, which all readers/lenders should be asking, and receives a wide variety of different answers.
Banks Restructuring ABL Groups
The tide is finally starting to turn as we get closer to the next recession. Interestingly, many banks are restructuring their ABL calling strategy to intensify efforts to better serve middle market business. In other words, they recognize an education gap exists regarding how best to educate bankers on the ABL product and then sell it to clients. It requires both a cultural change and a deeper understanding of a new product that is high touch. Banks are used to competing against each other as opposed to selling ABL. The banks that succeed in keeping more clients and better managing risk will successfully educate their front-line commercial banking groups.
Communication amongst groups is as important as education. At SG Credit, we have developed the “Triangle Offense” to better integrate with banks and help transition clients to and from each key division — C&I, ABL and special assets. Regional banking executives may know there is a problem, but might not want to give up the client for fear of the client getting stuck in special assets or have concerns over the client relationship if transferred. Banks rely heavily on their reputations in each market, and nothing is worse than an unhappy borrower spreading bad news.
SG Credit created this simple diagram to better work with banks who have strong bank ABL practices. Our capital is typically in the form of a structured term loan and acts like an unregulated pool of capital within a bank or ABL to better enable banks to keep, transfer or exit a client. The next iteration of better bank integration of ABL will be based on how well banks transfer C&I clients to ABL and thus keep the client that does not qualify for a C&I loan, rather than exiting in full. This is a major endeavor that the nation’s leading banks are actively working to accomplish. The challenge for large banks is to enact this strategy on a regional basis in every section of the country it operates in and to overcome its own silos of C&I, ABL and special assets.
We have now seen this first-hand. This writer has been on the phone within days, if not hours, of receiving a client transferred by a special assets division. The bank’s special assets and ABL groups both realized a financing gap existed and knew to call SG Credit to ensure the client had a solution. SG Credit did not re-invent the wheel or, in this case, the triangle, but we have started integrating with banks as they begin to appreciate the significance of bringing their ABL groups to the forefront. Providing an unregulated strip of capital can make a huge difference when transitioning from a traditional cash flow leverage structure to conforming ABL.
Historically, the process of converting clients to an ABL structure has been disjointed as bank-owned ABL is still a relatively recent trend, and banks would traditionally just exit stressed credits. Education and compensation are key when building a platform that requires cross-selling. Most banks have either formed or acquired ABL groups over the past decade. Still, the ratio of ABL to C&I clients is still very small in most banks. It is a mystery why banks do not see that integrating more with their ABL divisions offers can allow banks to keep clients and exploit a large market opportunity.
The banks that are most successful at executing this integration will keep more clients and better transition those clients to ABL when needed. Some banks talk about putting the client first, while others actually do it. Per above, investing in and integrating a multi-product platform is challenging, but highly rewarding if a regional or national bank can successfully assemble and integrate all products — C&I, private banking and investment banking and especially ABL — under one roof. Many banks are trying to do so, and it should be fun to watch and see which ones succeed.