Banks That Steered Clear of Subprime Lending Fared Better in Crisis

Strategic Insights -

Bank of Hawaii's Chief Executive Al Landon had reservations about participating in the subprime market, which ultimately led to massive losses for the banking sector. The International Monetary Fund estimates that the sector has suffered $1,000bn in losses, and is set to suffer a further $1,500bn in writedowns by 2010. Meanwhile, smaller lenders such as People's United Bank and Commerce Bank, which steered clear of subprime lending, have seen their share prices outperform those of larger rivals.

Key Takeaways:

  • Bank of Hawaii's Chief Executive Al Landon refused to participate in the subprime market, citing concerns about the long-term viability of such lending.
  • The International Monetary Fund estimates that the banking sector has suffered $1,000bn in losses due to subprime lending.
  • Smaller lenders such as People's United Bank and Commerce Bank have seen their share prices outperform those of larger rivals, despite lower profitability.
  • Executives at smaller lenders argue that their more cautious approach to lending has allowed them to maintain a focus on "know-your-customer" and "lend locally to long-standing corporate and individual clients".
  • Larger banks retort that smaller lenders were insulated from the most toxic products because they did not dabble in complex instruments such as mortgage-backed securities.
  • Bank of Hawaii's Mr. Landon advocates for a more conservative approach to banking, saying "if you are looking for rock-and-roll returns, go buy Apple shares".
  • A medium-sized lender executive notes that "the market will reward you for safe, long-term profits even though they happen to be lower than your rivals in any given year".

Statistics:

  • $1,000bn: estimated losses suffered by the banking sector due to subprime lending (IMF)
  • $1,500bn: estimated additional writedowns the sector is set to suffer by 2010 (IMF)
  • 80%: outperformance of People's United Bank's share price compared to Citigroup's over the past year
  • $18bn: assets of Commerce Bank
  • 300+: number of branches of Commerce Bank
  • 40 years: duration of Commerce Bank's consistent dividend payouts
  • 80%: of regulatory experts who believe that banks should be run like utilities, not profit-maximising enterprises (Financial Times)
  • 40%: of respondents in the Financial Times survey who believe that the conventional focus on shareholder value has contributed to the crisis.

Sources:

  • New York Times
  • Financial Times
  • International Monetary Fund (IMF)
  • Allan Landon, CEO of Bank of Hawaii
  • Philip Sherringham, CEO of People's United Bank
  • David Kemper, CEO of Commerce Bank