More of "The unbanker"

ABABJ: What will it take to convince the investment community that Norwest is a diversified retail financial services company and not a traditional bank?

RK: Time. If we continue to put up good numbers on the board, it will change.

But what it really will take and why it may not have happened more quickly is that the banking industry has just been too good the last five or six years. When everyone's had record earnings, Norwest doesn't [stand out]. What we need is for the [industry's usual] cyclicality to come back. When it does, and we're doing well, they'll say, "Oh I see, it's not a bank."

One of the reasons our stock has been doing so well lately is because people are concerned about revenue growth or are concerned about the credit issues in the banking industry and are more confident about our ability to grow both revenues and earnings should [credit problems] come about.

ABABJ: Some analysts question whether over time the mortgage banking business is a high performer.

RK: It is a cyclical business and we don't think it is a great business stand-alone. But we also know that mortgage banking is a four trillion dollar industry which is never going to go down, and there's money to be made in a four trillion industry. We've designed a company that's gone from nowhere eight years ago to being the leading mortgage company in the country. We make more money than anyone else, and we have had consistent earnings.

We think we have balanced the earnings in the mortgage company itself by the offset of servicing and origination, but particularly balanced it within the context of Norwest Corp. as a whole, and have tremendous synergy as a result.

The mortgage company uses the corporation's centralized computers, for example, and where we have banks, the mortgage company has offices in our banks--so there's a lot of costs that are absorbed. Add to that the cross-sell that occurs back and forth and the access to capital that the mortgage company has at lower rates than it would have if it were stand-alone.

Our whole point is that we're trying to eliminate the very cyclicality that the analysts worry about both within the totality of our company as well as in the individual companies themselves.

ABABJ: Why is there such cyclicality in lending?

RK: When things are terrible banks don't make any loans; we're so busy collecting our bad ones. In fact when things are really bad, we should be out there lending, that's when you find your best credits because no one else is doing anything.

When things are good you should start pulling back because it's only going to be a matter of time, before [credits start to sour]. Which is kind of what's happening with us now. If you read analysts' reports, they'll say "Norwest really isn't growing as fast as others and we suspect the reason is its conservative posture on credit." Well, they're absolutely right. This is the most dangerous time in the credit cycle. Everyone thinks we're never going to have another recession--it's wonderful times. Meanwhile structure is going down the tubes, pricing for risk is not anywhere where it should be, and that's exactly the forerunner to breaking banks.

ABABJ: Are you talking commercial loans?

RK: I'm only talking commercial loans. In my opinion, with the exception of credit cards, the consumer credit cycle this time is not a lot different than at other times.

ABABJ: But you hear mostly about the consumer side, and just murmurs about commercial lending...

RK: Yeah, because it's so wonderful. But you never write off a loan six months after you make it--it's two and a half years after you make it that you write it off. The industry today is making commercial loans that are going to give them problems, whenever the slowdown occurs, which it will, sometime.

ABABJ: Norwest was one of about 12 banking companies grandfathered many years ago to sell insurance across the country. With the Barnett Supreme Court decision, others can begin to duplicate that. Is insurance a lucrative business?

RK: We're the largest bank-owned insurance agency in the country and we're the 14th largest insurance agency of any kind. We'll have about $300 million in insurance revenues this year.

We know a lot about our customers. Take a commercial customer: one of the things we look for to make a loan is, do they have proper insurance? Given that we are already making that analysis, the incremental cost to us to sell them insurance is very low. The same thing when we make a mortgage. We require, of course, that they have homeowner's insurance and like them to have credit life. So it's an adjunct to what we already do.

We don't have separate distribution systems [and we aren't] in products we don't already know something about. That is how we have been successful in insurance and why we view it as a good product group.

ABABJ: Norwest is very successful at cross-selling products. Is one of the keys to that strategy having a data warehouse or other sophisticated database system?

RK: Very important. The winners of tomorrow will be those who have the richest database and know how to most effectively use it. One of the advantages of multiple financial services is the richness of the database you have. Think of what you know about that customer if you have eight relationships with him instead of two.

ABABJ: In some businesses Norwest is already a national company, although you don't see the name as much in the East. Do you feel like you want the company name to become a national brand?

RK: First, we only want to be in banking in about 25 of the states. Second, the mortgage business is almost an indirect business--we go through real estate agents, so having a brand name doesn't make a lot of sense. The finance company also is basically an indirect business. With both of these I mean the initial customer contact is indirect. So I don't see us spending the amount of money necessary to have a national brand image because I don't think it's going to help our businesses that are not banks.

But in the places where we have banks we absolutely want to have a brand image. Our goal is to have 50% of our customers in a state say "Norwest" when asked, "Who is the premier financial institution in your state?"

ABABJ: Why wouldn't you put banks in the other 25 states?

RK: Culture is very important to success in banking. By culture I mean that if the customers we deal with in a new geography are similar to the customers we have today, and the bankers are similar, there should be no reason why we can't be successful. Or to state it another way, we think banking in New York City is very different from banking in South Dakota. Why try to have multiple cultures when the difference between us going from Iowa to Missouri is hardly any difference at all, whereas if we went to New York with the image and positioning we have today, it would be a disaster.

ABABJ: Also true of California?

RK: California has two different cultures--northern and southern. Northern California would be just fine for us, southern California would be a struggle. Even in Texas, we're not really much in Dallas and Houston, but everywhere else.

It's difficult to create and nourish one culture. It's impossible to do two or three.

ABABJ: Some large banks are moving toward a more centralized arrangement. Norwest seems quite decentralized with a lot of authority out in the field. Which is right?

RK: We think we're at about the midway point between two extremes. Some large banks say to an acquired bank, run this operation the way you want, with the products you have. We'll leave you alone and you produce the income.

Norwest would never say that. We'd say, here is what we'll require you to do, here's what you do yourself. You will have the same products [as the rest of our banks]; we are going to consolidate operations, we are going to consolidate treasury, legal, human resources, and so forth. What you will be able to do is decide what customers you're going to have, how you're going to price your product, and which products you decide to promote from the bag of products we have.

The value here is in the back-office synergies--things that aren't that important to the customer that you could get some economies from.

Other large banks go further than we do [at consolidating]. They don't want you to make any pricing decisions or marketing decisions. They have everything centralized. We don't think that makes sense either. We think it's important to leave customer interaction, customer service, marketing, and pricing local.

ABABJ: When you say local, how local do you mean?

RK: Each market. The Spearfish, S.D., market is different from Sioux Falls, S.D., which is different from Des Moines, etc.

ABABJ: Is your bank in Spearfish a separate charter?

RK: It's a branch that reports to a regional president. But the branch manager has authority to price.

The bottom line has to be reached, but how you get there is up to you. The regional president will coach and suggest, but we have no policy that says, every bank in this state must do this. Now obviously if we're advertising in the Twin Cities market we can't have different pricing coming from our Wayzata bank [a suburb of Minneapolis] and our downtown bank. And we don't allow the Wayzata commercial bankers to go over to St. Paul and steal customers from our bank over there.

The reason we don't get a lot of negative feelings about the things we consolidate is it's in [the branch managers'] interest. If we're really saving them money it allows them to be more competitive.

You have to have a reason to centralize, otherwise it should be decentralized. The specifics can change, of course. For example, we're now consolidating to even fewer operating centers than we used to have because technology has advanced so we need bigger factories to justify the investment. We see that as a natural evolution. But the principle is still there. I don't ever foresee the day when things like pricing decisions and credit decisions will ever become centralized. A lot of my colleagues disagree with that.