Compound growth Featured

6:08am EDT April 21, 2006

When George Schaefer Jr. talks about growth, you should pull up a chair and listen.

Schaefer, president and CEO of Fifth Third Bancorp, took the helm of the institution in 1989 when it had about $5 billion in assets. It wasn’t even the biggest bank in Cincinnati. Today, it has more than $105 billion in assets and is one of the top 15 bank holding companies in the nation in terms of assets.

The last two years have been solid but disappointing by Fifth Third’s own high standards. But Schaefer, says you have to focus on the long-term plan to build an organization that generates consistent results.

“I think Fifth Third has always and will continue to take the long-term view,” says Schaefer. “This year we are planning to build 75 new offices and consolidate another 20 to 25. We are continuing to invest in the infrastructure. Those are all long-term investments we are making. They are not for the next quarter. If they were just for the upcoming quarter, there would be no new offices or additional staff. It would strictly be expense focused.

“These are difficult decisions. Every time we open a new office, we understand how much it will cost us. We understand how many hundreds of thousands that new office will cost us, but we also know that it will make us millions in the future. We have to deploy our capital so we get the best returns to continue to grow in order to continue to expand our shareholder value.”

Consistent growth has been a Fifth Third specialty. In the last 10 years, deposits, loans, assets and net income have all increased more than fivefold. And all of this has been achieved in a hypercompetitive banking industry where there are more than 300 competing banks and thrifts and more than 500 credit unions —and that’s just in Ohio. It doesn’t count competitors in the other nine states where Fifth Third or its affiliates operate.

When times are tough, the temptation to slash costs is high, but that strategy is short-sighted and ultimately reduces your long-term growth. Schaefer will tell you that you cannot shrink your way to long-term success.

In a difficult economy with flat returns, many banks would be looking to scale back, but Schaefer was investing in distribution, people, customer services and technology to prepare Fifth Third for growth.

Bank branches — or banking centers, as Schaefer calls them — are an important part of Fifth Third’s growth strategy. They are expensive to build, but despite the rise of Internet banking, they still provide an important point of contact with new and existing customers.

“Those centers drive a significant part of our retail business,” says Schaefer. “You might want to bank at Fifth Third, but if there are no offices nearby, it will be difficult to bank with me. Those are the reasons why we continue to add offices. Those are full-service financial centers where you can make a deposit, open an account, get a loan, make investments or get a mortgage. It is a delivery system for our full product line.”

Last year, Fifth Third added 63 new banking centers and relocated others to improved locations. The year before, it added 76 new locations and made an acquisition in Florida that netted another 77 offices.

Like any other retailer, Fifth Third has an average customer profile that helps it target areas for new offices or better spots for existing ones.

“We have some good software that looks at where we are most successful,” says Schaefer. “We overlay that in new areas and try to match our profile to our target demographic. We do this throughout our entire footprint.”

The bank is primarily in 19 metro areas. Before it will add new ones, Schaefer says it makes more sense to fill in where the bank has not yet maximized its full potential.

“When we go into a market like a Chicago where we only have 3 to 4 percent of the market, there is an opportunity to pick up 96 percent of the customers in that market. If you already have 50 percent in an Ohio city, it is less likely we would expand further there, because it is much harder to get from 50 to 55 percent in one city than to go from 4 to 10 percent in another city.”

When enough locations are in a particular city, the emphasis shifts to cross-selling more products to existing customers.

When it comes to investing in people, Schaefer follows a basic principle: More salespeople usually means more sales.

“We are trying to take advantage of our presence in a market by adding more qualified salespeople to the team,” says Schaefer.

Being one of the top 15 banks in the nation as measured by deposits helps attract top talent. Last year, the bank added almost 1,400 new employees. Training from an 80-person education department helps fill specialty positions that require a high degree of expertise and keep everyone efficient.

Accountability is the key to a successful sales force. Tie in personal incentives to corporate goals to keep driving revenue growth.

“We do give everybody targeted goals,” says Schaefer. “We measure their unit sales per day or per week. We reward appropriately and make sure that we take care of our outstanding performers, and for people that are not hitting their targets, we are coaching and counseling them.

“The other nice part of it is, we have 6 million customers. We already have a natural base of customers, and not all of them have a checking account. We might sell a checking account out of a mortgage. Not all of them have a credit card, so we might sell a credit card from a checking account. We are trying to sell more to our existing customer base.”

Customer service
Fifth Third wants to know what people think. The company constantly polls customers to find out what it is doing right and what it could do better.

“We poll our new customers, our existing customer and customer who have left the bank,” says Schaefer. “We survey them to find out what their experience has been. We try to learn from the surveys where we have been successful, what it is that makes us successful and where we have issues. We try to quickly identify and solve those issues.”

The company is continuously fine-tuning its processes to improve the overall customer experience. For example, customer suggestions changed how the bank assesses fees and how much authority customer service reps have to waive fees. It also led to not making collections calls on Sundays because that was poorly received by customers.

The polling also revealed a desire for better service for better customers.

“Customer segmentation has really helped us,” says Schaefer. “When you come into a branch or when you talk to us, we now know whether you are one of our best customers or not one of our best customers, and we can respond in accordance to your value here. If you are one of our best customers and you end up on a collections item because you were on vacation, we’ll know that now and won’t be giving two calls saying we missed your payment.

“We know you are a good customer and are probably traveling or something. In the past, we treated all 6 million customers the same. We found it was very important to treat them differently.”

The standardized polling also shows that the bank has better customer service than two-thirds of its peers.

Efficiency is important for growth, and eliminating excess labor and time from a process equals greater profits.

“If you walked into one of our offices two years ago and wanted a copy of a check, the request would have been transmitted downtown, an operations person would have looked it up and faxed a copy back to the branch,” says Schaefer. “The whole process would have taken two to three days. Now, every one of our teller platform people has a picture of every check written on their PC. It’s the same data that we have in the headquarters. There has been a significant improvement in efficiency there.”

Technology has also been implemented to identify theft and fraud to make sure checks aren’t being paid on two or three times.

The other way Fifth Third has leveraged technology is to better communicate with all its banks. Its model focuses on local authority and decision-making within the framework of the larger corporation.

“It allows the bank in, say, Cleveland to run like a small community bank but have all the benefits of being a $105 billion-asset highly rated institution,” says Schaefer. “When you walk into a local branch and need something, the people there know exactly who you should be talking to. In most big banks, the different lines of business are headquartered in different cities. With our banks, each individual market has all the skills right there.”

But all the banks are on the same platform, which helps not only customers who might visit a branch in different city but also employees who might transfer.

“If a teller in Naples, Fla., goes to Cleveland, it’s the same functionality,” says Schaefer. “If you walk into Orlando, it’s the same system. All the back office operations are centralized. No matter where you go, the experience is the same.”

Consistent service ultimately yields consistent results.

“I think if you look at our growth trajectory, the key drivers in our business — deposits, loans and fees —have all really remained intact,” says Schaefer. “Our annual growth rates have been very consistent. Our commitment to service, technology, corporate governance and risk management allows us to compete in the local marketplace while maintaining our local market differentiation.

“Financial discipline is the foundation of all great companies. We continue to invest in a manner that enhances our value while compensating us for the risks that we are taking.”

The bank made $1.55 billion in net income in 2005. The return on equity was almost 17 percent, and the return on assets was 1.5 percent.

“We continue to grow deposits well,” says Schaefer. “Our core deposit growth and loan growth is excellent. Our fee business was up double digits, and we are keeping a close eye on the expense side.”

It’s all part of Schaefer’s long-term growth plan that comes one day at a time.

“I think it’s the focus on the daily execution that matters,” says Schaefer. “It comes down to how many checking accounts, loans and what you sold today. You have to take care of the customer and make sure the customer experience is excellent. To make that all work, you have to constantly have the best employees, which is why we’ve spent a lot of time building the best team in the industry.”

How to reach: Fifth Third Bancorp,