The bulk of financial institutions’ income comes from loans, so it came as no surprise when a Jack Henry survey found that 67% of community financial institutions’ CEOs are fiercely focused on growing loans in the upcoming months. However, a potential recession usually scares people away from opening new businesses or buying homes, especially in the current high interest rate environment. In fact, S&P Global reported that loan growth at the big banks cooled down in the third quarter of 2022 as demand decreases and lenders continue to tighten standards. According to Jefferies’ early-November note, loans “were the softest they have been since early-pandemic and [Great Financial Crisis] periods”.

Maintaining or increasing loan volumes in the next year will become challenging for most financial institutions, but here are some ways to do it:

Leverage loan marketplaces to expand your reach – Diversifying loan portfolios enables financial institutions to boost performance, resilience, and asset quality, while minimizing risk, which is particularly important in the current economic environment. Online marketplaces for loan trading, selling, and participation offered by technology vendors enable unbiased access into new markets nationwide. These open and flexible platforms compare a financial institutions’ loan metrics against potential buyers who might be interested in that type of listing, facilitating a quick and seamless trade. They also enable institutions to better manage their existing portfolios, easily reducing large concentrations of a particular loan type (e.g., asset, transaction, size, geography, rate etc.) and minimizing risk.

Focus on the customers you already have – People tend to stray away from change ahead of or during a recession and might not be looking to switch their financial institution. This might make attracting and acquiring new clients in the upcoming months trickier than in a stable economic environment. However, getting closer to existing clients, communicating frequently with them, understanding their challenges, and making them feel safe during these testing times might create opportunities to expand those relationships. For example, bankers might find that a client is planning to open a new business and will soon be in the market for a commercial loan. Or that another client wants to downsize their car and is looking for a new auto loan. These scenarios present opportunities for bankers to grow loan volume, become trusted advisors to their clients, and plant the seeds for the institutions’ banking relationships of the future.

Venture out of your comfort zone – Financial institutions should examine the evolving needs of their communities and see if there are any opportunities they can tap into. For example, is the adoption of renewable energy increasing in their area, triggering demand for solar or wind projects? Are local staffing companies in need of help due to a nationwide shortage of talent? Or are there nonprofit organizations in their community that need support? Moreover, financial institutions should examine what services are going to increase in demand during a recession e.g., debt consolidation or emergency expenses, and start preparing to serve those clients. Recessions can create opportunities if financial institutions are ready to step out of their comfort zones, identify niche markets, and expand their reach.

Demand for mortgage or auto loans might be decreasing, but there are plenty of untapped opportunities that financial institutions can take advantage of during a recession. Loan trading can help diversity loan portfolios and build the institutions’ resilience; getting to know existing clients might help bankers discover new ways to optimize those relationships; and tapping into niche markets will ensure financial institutions will maintain, and even increase, loan volume in a down economy. As they say, “It’s only after you’ve stepped outside your comfort zone that you begin to change, grow, and transform.”

About Author:
Ken Summar is Director of Advisory Services, Lending at Jack Henry. He has more than 30 years of commercial banking experience in executive positions at Jack Henry and First American National Bank. Jack Henry (NASDAQ: JKHY) is a leading SaaS provider primarily for the financial services industry. Read more about their lending contributions here.


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