Growth is one of the most celebrated concepts in banking. It is also one of the least examined.
A growing loan book is read as a signal of competitiveness: it is reported as an achievement, built into the budget, used to measure commercial performance. That reading carries a dangerous simplification—assuming that balance sheet growth is equivalent to economic value growth.
Not necessarily.
A bank can grow its assets and, at the same time, reduce the value it generates per unit of capital committed. It can grow its outstanding balances while losing room to maneuver.
The relevant question is not how much the bank grows, but what kind of growth it produces and what future capacity it consumes to produce it.
When Narrative Replaces Discipline
Part of the industry still treats growth as an objective. Economic discipline requires treating it as an outcome.
The difference sounds semantic.
It is not.
A transaction can be profitable and still fail to create sufficient value: it can clear zero and still fall short of the return required by the capital it consumes. And even clearing that hurdle, it may not be the best possible allocation if another alternative offered a better return for comparable capital and risk.
Profitability, value creation, and optimal capital allocation are three distinct questions.
Conflating them turns volume into a misleading measure of success, and the problem begins when the organization stops asking about the economic composition of its growth and celebrates only its size.
A portfolio can grow because the bank is capturing attractive opportunities and selecting its risk well. Or it can grow because criteria were relaxed, exceptions were accepted, or relationships were defended that did not adequately compensate for the capacity they consumed.
From the outside, both kinds of growth look the same. From the inside, they are not: the second accumulates fragility while the indicators still look favorable.
What the Balance Sheet Does Not Yet Show
Fragility does not always originate in a single bad credit decision.
It can emerge from growth that was properly approved but insufficiently remunerated, from aggressive pricing against the competition, or from an expansion that demands more capital and operational capacity than its return justifies.
It can also emerge from growing faster than the organization can manage: when assets grow faster than the capacity to analyze and control them, the bank increases its size without proportionally increasing its economic capacity.
The same logic operates when an exception progressively becomes a practice. One weak transaction is justified by the importance of the client; another, by competitive pressure; another, by the need not to lose market share.
In isolation, each may look reasonable. Repeated, they change the composition of the balance sheet: first it is tolerated, then it is repeated, and finally it becomes precedent.
Risk does not only accumulate on the balance sheet—it accumulates in institutional memory, at the point where “we have already approved similar cases” stops being a reference and starts replacing the analysis.
Deterioration rarely shows up first in NPLs. It shows up earlier in the language of the committee, when more transactions are defended on the basis of “overall relationship” or “strategic client” and less time is spent discussing the economic return of each one; and it shows up in the gap between balances and margin, when the portfolio grows but return on capital does not grow in the same proportion.
When both signals coincide, the bank is no longer merely growing: it is quietly changing the quality of what it grows.
The Price of Confusing Relationship with Value
The client relationship can contribute real value: better information, better risk assessment, additional revenue.
The problem appears when the overall profitability of the relationship is used retrospectively to justify a transaction that, under the bank’s own economic criteria, is not sufficiently attractive. The relationship should complement discipline, not substitute for it.
A Banco de España study on relationship lending documents that the exclusivity of the bank–firm relationship has a positive effect on credit growth, and that this effect is significantly reduced when the accounting framework for loss recognition changes, particularly among riskier borrowers and firms whose credit quality had already deteriorated.
The finding does not say that every relationship produces bad decisions. It does show that the relationship can alter the incentive under which a bank decides to sustain or restrict credit when borrower risk changes.
That is why separating healthy growth from apparent growth requires three changes.
- Classify growth by economic quality, not just by volume. If a portfolio grows 10% annually but one third of that growth generates a 5% return against a 9% cost of capital, the bank cannot read that 10% as a homogeneous expansion of value: the aggregate hides its composition, and celebrating it without distinguishing that composition is institutional self-deception.
- Make origination patterns visible. An isolated exception may be reasonable, but when the same justification is repeated quarter after quarter, it is no longer an exception—it is unnamed informal policy.
- Incorporate opportunity cost. Capital is scarce, and a transaction should not be benchmarked only against doing nothing, but against the alternative it crowded out.
