When Vernon Hill founded Commerce Bancorp back in 1973
few observers could have predicted it would become a regional US
banking powerhouse. Now, little more than a year after its sale to
Toronto-Dominion for $8 billion, Hill is back centre stage with
ambitious plans on both sides of the Atlantic, reports Douglas
Blakey.
Vernon Hill, one of the genuine retail banking stars
of the past 30 years and among the industry’s most outspoken
commentators, is back.
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Little more than a year after the sale of Commerce Bancorp – the
bank he launched with one branch, nine staff and $1.5 million in
capital in 1973 – to Canada’s Toronto-Dominion (TD) for $8.5
billion (see RBI 580), the
charismatic and energetic Hill has announced ambitious plans for
new banks in both the US and the UK.
The new outfits will be called Metro Bank, but Hill is at pains
to stress that while the banks will share a name and branding,
there is no legal relationship between the US and UK
operations.
“We are going to do it again,” Hill said in an interview with
RBI.
In the UK, Hill said, Metro Bank would open with an initial four
branches in the summer of 2009.
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By GlobalDataHe added: “I am spending serious money every month to make sure
it will happen.”
In the US, Central Pennsylvania-based regional lender
Pennsylvania Commerce Bank’s October merger with Republic First
Bank (see RBI 602), in which
Hill is a major investor, forms the basis for the re-named Metro.
It will operate on the original Commerce model, with Hill acting as
a consultant.
“Pennsylvania Commerce ran the exact Commerce model under
licence; I gave them a franchise and they built up a $2 billion
bank. They were not sold during the TD deal and a lot of the
original Commerce people have come with me to the new bank,” he
said.
Metro Bank in the US will start life with $3.2 billion in assets
and 45 branches with plans to expand outside of central
Pennsylvania.
“Metro Bank will be America’s next great bank,” was Hill’s
upbeat and succinct assessment of Metro’s prospects.
He was unfazed by the challenge of starting two new banks in the
midst of the worst economic crisis in more than 70 years.
“I like to go against the grain.”
Power Banking
Hill’s innovations at Commerce Bancorp – he talked of
reinventing retail banking – included evening and weekend branch
opening, free coin-counting machines and a fervent focus on service
excellence all wrapped up in a phrase he invented: Power Banking.
He also held an unswerving belief in the importance of the branch:
by the time TD snapped up Commerce, the branch network had grown to
470 outlets.
Hill talked of turning banking from drudgery into fun – and
shareholders shared in the fun. In the 20-year period prior to the
TD deal, they earned an average annual return of 23 percent, in a
stock market that returned less than half that over the same
period. Commerce’s success also encompassed a number of business
awards, including the award for Best Retail Bank – Americas and
Best Branch Strategy at RBI’s global banking awards in
2006.
According to Hill, Commerce was a retailing concept and not
really a bank at all – in the past, he has argued that the biggest
danger which faced Commerce was becoming burdened with the mindset
of a bank.
“Every executive decision I made was designed to make the
customer experience better… How do I build more fans… not how do I
cut costs or how do I improve this quarter’s profit,” he told
RBI.
Deposits deposits deposits
As for the main lessons retail bankers ought to learn from the
current turmoil, Hill is blunt.
“Deposits, deposits, deposits… This crisis has proven in the US
and in the UK that funding is the key thing,” he said.
“At the core of a bank is its deposit base and that has proven
more true than I thought,” he added.
It remains a proud boast of Hill’s that Commerce had no debt in
its business plan, no reliance on wholesale funding and relied
wholly on organic growth to grow its franchise. The same strategy
will apply to the new Metro Banks.
“Deposits come with customers who build a banking business.
Wholesale funding is an opiate that feels good, is unsustainable,
and leaves just when you need it.”
According to Hill, the second major lesson of the current crisis
is that the importance of the branch – “the cornerstone of any
bank” – has returned with a vengeance. He is adamant that banks
with value-added branch programmes have prospered by building
customer numbers, while the majority of banks that tried to
cost-save their way to prosperity have lost major market share.
“I believe the facility and the location are very important. If
anything, in the past we have tended to over-invest in the
facility. The new banks’ branches will be great retail locations,”
said Hill.
And Hill is equally adamant that Metro Bank in the US and the UK
will rely on organic growth and not seek to merge their way to
prosperity.
“Our business models contain no debt, no wholesale funding and
no acquisitions,” he insisted.
While just about every major banking merger or acquisition has
been accompanied by promises of dramatic cost savings, enhanced
shareholder returns and better customer service, Hill is largely
dismissive of many deals.
“These major deals usually fail to produce meaningful
benefits… and many such deals just destroy service, eliminate
jobs and destroy massive amounts of shareholder value.”
The brand is the most important asset
As for the TD/Commerce deal, he is dismayed by TD’s decision to
drop the Commerce name and brand. He has argued a company’s brand
is its most important asset but said it consists of much more than
the message conveyed in advertising. The brand is “what you are,
who you are, and the experience your customers can expect to
receive when they do business with you”.
But within months of acquiring Commerce, TD decided to rebrand
its entire US retail operation.
“If you paid $8.5 billion for what was recognised as one of the
best brands in the East coast in banking why would you go out of
your way to destroy the name and the brand?”
As for his observations of the wider retail banking sector, he
is scathing about much he has witnessed in the past year.
He recently described Citigroup as an “incoherent, unworkable
business model, run by a senior management team that is largely
unproven, with scant experience operating a large financial
institution”.
While for the failed Washington Mutual he said: “WaMu long
touted its expertise in mortgage lending. Yet over time, it paid
the highest prices to produce the worst credit – all delivered with
abominable service.”
Looking ahead, Hill is optimistic and has argued commercial
banks with stable deposit funding will prosper; credit will
continue to grow and while innovation will suffer, risk will be
reduced.
“Despite the massive failure of not only Wall Street and also
the federal government, America will solve the problem and continue
to prosper… American ingenuity has always overcome government
idiocy and in this case Wall Street excesses, and it will
again.”
Three million customers
In the UK, the new Metro Bank will seek to target the three
million banking customers who have recently expressed an interest
in switching banks because of poor service. It will offer current
accounts, savings, loans and mortgages to retail customers, and
will also enter the business banking market.
“Our application is in to the FSA, we plan to capitalise with
£100 million ($153 million) and I believe it will happen.”
Metro will seek to differentiate itself in the UK market by
offering superior service and convenience with branches open seven
days a week.
Within five years of its launch, Hill has predicted Metro will
have built a balance sheet consisting of £4.1 billion in assets and
nearly £300 million in equity.
By year five, Metro in the UK estimates total revenue in excess
of £150 million; net income of £16.3 million and a net interest
margin of 3.3 percent.
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Strategy Toronto-Dominion (TD) lost no time in dropping the Commerce name in According to Hill, TD has already started moves to “trim a And while TD has weathered the current market crisis better than In a presentation to analysts in mid-November, TD’s CEO, Ed “We have a very strong deposit base… actually a bigger deposit He added that TD had no need to raise capital and suggested that Compared to its Canadian peers, however, TD’s write-downs are TD is due to report its fourth quarter earnings on 4 December |
