In most cases, he says, the information isn't hard to collect. "For short-term loans," he says, "we know the outstandings we've had with each bank, we can estimate how many days so we can get an average outstanding per borrowed day, and we know the spread they've been charging." That's enough to estimate the banks' net interest income. Similar information is available for other types of loans, as well as for short-term investments, he says.
Likewise, Schutte tracks treasury fees such as cash management and fees for banks that act as collateral agents or trustees on bond issues. "We capture as many of those types of fees as we can," he says. To calculate each bank's pretax net income from fees, he says, "we then apply the [overhead] efficiency ratio that is published in their financial statements." (Schutte makes an exception for banks with excessively high ratios, instead applying the average ratio for Edward Jones's full bank group. "We don't reward any bank for being inefficient," he explains.)
Finally, Schutte totals up fee and interest income and subtracts taxes — based on the tax rate that the banks report in their financial statements. "That gives us our best guess at their after-tax net income figure for Edward Jones," he says.
Large one-time capital-market fees for services such as private placements — which Edward Jones does every few years — are spread over a similar interval. "The bank that does the private placement gets a pretty significant fee," he explains. "We allocate that over the interval so they don't have such a volatility in their earnings and return calculations."
To calculate the bank's return on assets (ROA) for his firm, Schutte divides the total net income for each bank by the average assets Edward Jones has placed with that bank. He also calculates a return on equity (ROE) using an assumed capital requirement of 8 percent. That's the amount of capital banks must set aside under international regulations known as Basel I. "We don't try to determine what their individual equity ratio is," he says.
Schutte ran early results of his model past some of his bankers several years ago and made only minor tweaks based on their feedback. "For the most part, we were in the ballpark," he says. "It is an art on our side, but it's still an art on their side, too."
Schutte compares the ROA and ROE figures to the ratios published in each bank's annual report to get a sense of how valuable Edward Jones's relationship is to each bank. "If we are significantly below where they are, then we conclude that we are deemed not sufficiently profitable. And if we are significantly above, we conclude we must be significantly profitable." He says he has used the model only once to move business from one bank to another, but he uses it regularly to award incremental business. "We're not trying to wring the last nickel out of our bank relationships; we are trying to ensure that our relationships are profitable to them so that we can rely on them being credit providers," Schutte says.
The Chance to Bid
Schutte's attitude is one bankers would dearly like to see more of, particularly as commercial banks reach for more investment-banking business and investment banks increasingly are forced to participate in low-return business such as credit facilities.
Wells Fargo's Hardy argues that companies can start improving their bank relationships simply by taking an inventory of all financial services purchased throughout the company and making sure that their bank group gets a shot at the business. Many potential bank services, he says, are purchased by the human-resources department, purchasing departments, operating divisions, and the legal department without consulting anyone in finance. "Banks want the opportunity to compete for that business," he notes.
Fidelity has been using its centralized Bank Services Division to evaluate every bank service purchased throughout the company for more than seven years, says director of bank services Brenda Walsh. "Our responsibility is to make sure management is aware of the full scope of all of Fidelity's banking arrangements," says Walsh. "The mere fact that there is a role like mine at Fidelity shows that we take it very seriously."
But not every company is lucky enough to have Fidelity's resources, and there are other challenges. "Corralling our foreign subsidiaries to use one of our corporate banks can be a challenge," says Cabot's Wagner. "I think the challenge for a lot of multinationals is just the limited amount of bank business that you can allocate back."
Indeed, 12 percent of CFO survey respondents said they have difficulty giving their banks enough additional business to justify their credit needs. "To be brutally candid, that may be a situation where we are never going to have a profitable relationship," former Bank of America CFO Oken told CFO earlier this year. "We tend to exit those relationships by mutual agreement."
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