An efficient operating model for US regional banks

An efficient operating model for US regional banks

To break out of a performance rut, US regional banks must fundamentally redesign and simplify their operating models.

Over the past four years, US regional banks, on the whole, have continued their recovery from the Great Recession. Return on equity (ROE) is at long-term levels of around 10 percent, credit quality appears to be strong, and some businesses are posting solid growth. Industry performance averages, however, mask the wide variation of performance at the individual bank level. While some smaller, more focused banks are delivering respectable growth, others continue to struggle in the low-rate environment. Many that have not already fallen victim to industry consolidation teeter on the edge of being acquired.

The view ahead is no easier. Regional banks need to change their performance trajectory by generating more growth and becoming more efficient. We estimate that to stay relevant, regional banks will need to lower efficiency ratios over the next few years to the mid-50s from the current mid-60s (for some banks) and raise ROEs to the mid-teens from current levels of around 10 percent. To return to healthier ROEs, more regional banks are contemplating fundamental changes to their operating models, particularly in the area of costs. Our experience with holistic operating model transformations at regional banks suggests that operating model transformations that focus on both performance and organizational health can yield improvements in efficiency of up to 20 percent.

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