Robert Wilmers is a masterful banker. As the chief executive officer of M&T Bank (NYSE:MTB) since 1983, he's generated shareholder returns that are unmatched by all but the world's finest executives and investors -- including Warren Buffett, who, via Berkshire Hathaway (NYSE: BRK-A), is one of the bank's biggest shareholders.
On top of this, the 79-year-old executive also happens to be the author of arguably the most candid and insightful annual letters to shareholders put out by a publicly traded bank. They aren't as widely read as, say, Buffett's annual missives, but for those that aspire to bigger and better things in the bank industry, they're required reading.
It's for this reason that I periodically reread Wilmers' annual letters. What follows, in turn, are seven insights, followed by Wilmers' quotes, that I came across after spending a recent morning doing so.
1. Efficiency is critical in highly competitive industries
In a marketplace in which competition is intense, it is more important than ever to operate as efficiently as possible. It is not simplistic to remind ourselves that dollars saved are still dollars earned.
It's worth noting how closely this mirrors Warren Buffett's view on the insurance industry:
The insurance industry is cursed with a set of dismal economic characteristics that make for a poor long-term outlook: hundreds of competitors, ease of entry, and a product that cannot be differentiated in any meaningful way. In such a commodity-like business, only a very low-cost operator or someone operating in a protected, and usually small, niche can sustain high profitability levels.
2. Reaching for yield in the short-run comes back to haunt banks in the long-run
It is important to reflect on the essential nature of the mistakes into which we strayed [in the lead-up to the financial crisis]. They were linked by a common temptation -- the search for additional returns on investment and, crucially, taking on additional risk in the search for those returns.
3. If you want to gauge a bank's potential, look to the markets it serves
[T]he prospects for growth in any financial institution engaged in the business of furthering commerce is explicitly linked to the underlying health of the communities it serves.
4. Great banks resist the temptation to lower credit standards in boom times
During a period in which many banks responded to competition by relaxing loan pricing and credit standards we did not, for we had the discipline during the bubble years (2005-2007) to walk away from some lending opportunities, rather than pursuing growth for its own sake. We are, today, realizing the benefits from turning away from the sirens of what seemed like low risk and high reward. Indeed, we take the view that if there is not enough demand from creditworthy customers, it is better for M&T to return capital to shareholders -- who may well put it to productive use in sectors of the economy other than the banking industry.
It's no coincidence that this tracks a similar statement by Wells Fargo's CEO John Stumpf:
Because of our prudent lending to customers with less than prime credit and our decision not to make negative amortization loans, we estimate we lost between two and four percent in mortgage origination market share from 2004 to 2006. That translates into losing between $60 billion and $120 billion in mortgage originations in 2006 alone. We're glad we did. Such lending would have been economically unsound and not right for many borrowers.
5. Speculative trading conflicts with the fundamental purpose of banking
[S]peculative trading activities, whether inside or outside the banking industry, center on making profits from the market by exploiting visibility into customer order flows, taking advantage of market imperfections, obscuring otherwise transparent market prices, and controlling parts of the commerce supply chain. Participants in such activities benefit from longer delivery delays, higher prices, volatility and shortages. What manufacturer or supplier of goods to the real economy does not seek predictable supplies, faster delivery times, and stable prices that ultimately benefit their customers? Suffice it to say that speculative trading activities are at odds with commerce, the facilitation of which is the very function of banking.
6. Extravagant compensation by Wall Street bankers is bad for the industry
[O]utsized compensation based on limited personal risk but great public exposure invites resentment and not unjustified populist anger.
7. Good loans tend to be local loans
An analysis of our loan portfolio has found that there is a strong correlation between good loan performance and proximity of the customer to an M&T branch -- in other words, the closer to a branch, the better the loan.