the resurgence of profitability analysis in financial ... · pdf filehowever, what passes for...

© 2016 Kaufman, Hall & Associates, LLC. All rights reserved.

©2016 Kaufman, Hall & Associates, LLC. All rights reserved.

The Resurgence of Profitability Analysis in Financial InstitutionsKen Levey:

Vice President – Financial Institutions

Bryan Ridgway:

Senior Solutions Engineer – Financial Institutions


Resurgence of Profitability AnalysisSession Objectives

To understand why profitability

analysis has become a focal

point for financial institutions

To provide best practices for

establishing a profitability

analysis framework

4© 2016 Kaufman, Hall & Associates, LLC. All rights reserved.

Resurgence of Profitability AnalysisAgenda

• Market and peer perspectives

• Why profitability now

• Start with the end in mind

• Best practices

• Practical examples

• Recap and Q&A

Market and Peer Perspectives

5


MARKET PERSPECTIVESReturn on Equity

Federal Financial Institutions Examination Council (US), Net Interest Margin for all U.S. Banks [USNIM], retrieved from FRED, Federal Reserve Bank of St. Louis

Return on Equity


MARKET PERSPECTIVESReturn on Assets

Federal Financial Institutions Examination Council (US), Net Interest Margin for all U.S. Banks [USNIM], retrieved from FRED, Federal Reserve Bank of St. Louis; CUNA Mutual Group

ROA – Banks and Credit Unions

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

2012 2013 2014 2015 2016

Credit Unions Banks


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

20

12

Q3

20

12

Q4

20

13

Q1

20

13

Q2

20

13

Q3

20

13

Q4

20

14

Q1

20

14

Q2

20

14

Q3

20

14

Q4

20

15

Q1

20

15

Q2

20

15

Q3

20

15

Q4

20

16

Q1

20

16

Q2

20

16

Q3

Quarterly Earnings for all FDIC insured Banks

MARKET PERSPECTIVESNet Income

FDIC Quarterly Banking Profile; 2016 Q3

Bank Earnings

FDIC


MARKET PERSPECTIVESNet Interest Margin

Federal Financial Institutions Examination Council (US), Net Interest Margin for all U.S. Banks [USNIM], retrieved from FRED, Federal Reserve Bank of St. Louis

Net Interest Margin


Do you believe your organization should be doing more to leverage profitability analysis to inform strategic decisions?


PEER PERSPECTIVESProfitability Analysis is Most Important Initiative

2%

21%

29%

38%

43%

48%

62%

68%

73%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Other

Financial consolidations and close

M&A and other strategic opportunites

Capital Planning and tracking

Long-range financial planning

Cost containment and efficiency

Operational budget and forecasting

Reporting and analysis to support decision making

Profitability measurement across various dimensions(customer, channel, etc.)


PEER PERSPECTIVES Profitability Dimensions


PEER PERSPECTIVESProfitability Analysis – Current State

We have gaps in our understanding, but are working to improve our profitability

We have not ventured very far with profitability reporting, but intend to

We have a clear understanding of the profitability of our products, customers


MARKET AND PEER PERSPECTIVESConclusion

“On the one hand, the prevalence of stagnant net interest margins across the industry suggests that institutions would be

desperate to get an accurate picture of exactly where the potential profits lie within their product lines and customer

bases, and to work to capitalize on those opportunities. However, what passes for profitability analysis in many institutions today probably isn’t going to reveal those

answers.”- June 2016. Perspectives on Profitability

Why Now?

Resurgence of Profitability Analysis


RESURGENCE OF PROFITABILITY ANALYSISMarket Environment

Current Market Challenges

Expectations of Better Times

Focus on Maximizing Earnings


RESURGENCE OF PROFITABILITY ANALYSISAbility to Analyze Profitability

Availability of Data

Improved Tools

Better Analytics to Support Profitability Analysis


RESURGENCE OF PROFITABILITY ANALYSISCultural Shift

Past Experiences

No Longer a Nice to Have

Focus on Decision Making

Start with the End in Mind



Typical ApproachesWe often start with the data and work from there

What data do we have

What calculations should we perform

What metrics can we

generate

What tools are needed

Who should get the results

What do we do with the results


Turn That Approach on it’s Head

Start with the End in Mind!


Resurgence of Profitability AnalysisHow you are going to use the results

What Types of Decisions are Going to be

Made

Who is Accountable

and How

What Information / Metrics are

Needed

What Calculations /

Methodologies are Needed

What Tools are Needed

What Data is Needed




Made

Who is Accountable

and How


Needed

What Calculations /



What Data is Needed

What Types of Decisions are Going to be Made?

Identify what types of decisions the organization is going to make with the profitability results

- Product focus

- Product pricing strategies

- Waive customer fees

- Customer service levels

- Cross sale opportunities

- Branch opening/closing

- Loan pricing, etc.




Made

Who is Accountable

and How


Needed

What Calculations /



What Data is Needed

Who is Accountable and How?

Identify who will be making the decisions and how they will be accountable for those decisions

- Managers (LOB / Product Managers; Dept. / Branch Managers; Region Managers, etc.)

- Front line employees (Relationship Managers, Loan Officers, Tellers, etc.)

- Bottom-line profitability

- Relative profitability

- Profitability trends (improvements)

- Part of standard performance review

- Integrated into incentive compensation plans




Made

Who is Accountable

and How


Needed

What Calculations /



What Data is Needed

What Information / Metrics are Needed?

Identify what information & metrics each person / role needs to make those decisions

- Net Interest Margin (NIM)

- Total profitability

- Return on Equity (ROE)

- Risk Adjusted Return on Capital (RAROC)

- Profitability grade

- Rankings

- Percentage groupings




Made

Who is Accountable

and How


Needed

What Calculations /



What Data is Needed

What Calculations / Methodologies are Needed?

Identify what calculations and methodologies are needed to derive those metrics and results

- Matched-term FTP

- Overhead cost allocations

- Product / unit costs

- Activity-based costing

- Capital allocations

- Provision allocations




Made

Who is Accountable

and How


Needed

What Calculations /



What Data is Needed

What Tools are Needed?

Identify the tools needed to support those calculations and methodologies

- MS Excel

- Already owned tool

- New tool(s) needed

- Single platform vs. separate tools

- Owned vs. Outsourced




Made

Who is Accountable

and How


Needed

What Calculations /



What Data is Needed

What Data is Needed?

Identify , and if needed create, the data needed to support the process / tool(s)

- GL data

- Instrument level data (loan, deposit/share accounts)

- Customer / Member information files

- Statistical data (FTE, sq. footage, hours, record counts, etc.)

- Transaction data

- Channel data

- Demographic data

- Credit data

Best Practices



Resurgence of Profitability AnalysisBest Practices

Make Profitability Matter

Create a Profitability

Steering Committee

Consider all Elements of Profitability

Establish a Profitability Roadmap

The Goal Should Not Be Perfection


Best Practices



Steering Committee





How do we get people to look at and understand the profitability results, let alone actually utilize them?

- Make metrics easy to understand and reconcile

- Tie profitability results to incentives

- Cultural Change


Best Practices



Steering Committee




Create a Profitability Steering Committee

It all starts with upper management making a cultural change

- Members compromised of cross-functional (department) personnel

- Decide on metrics, methodologies, tools and results

- Communication and Rollout plan

- Educate all employees on metrics and what they mean to the institution and to them


Does your organization have a profitability steering committee?


Best Practices



Steering Committee





Steps and Processes

- Net Interest Margin (including Funds Transfer Pricing)

- Non-interest income and expense attribution (direct costs, allocated costs, unit costs, activity costs, etc.)

- Loan Loss Provision

- Capital Allocation

- Multi-Dimensional reporting and analysis


Best Practices



Steering Committee





How do we get there?

- Define your end vision

- What processes should we start with (i.e. FTP)

- Don’t’ get overwhelmed by trying to accomplish too much at once


Best Practices



Steering Committee





Profitability should be a relative metric

- Decide how to use the metrics and compare them to a

- Baseline

- Previous periods

- Other segments (department, customer, products)

- Ensure those metrics and consistent and defendable

- Make sure those metrics are understood by all

Examples



Department ProfitabilityRanking Report


Product ProfitabilityTrend Report


Customer ProfitabilityP&L Report


Customer ProfitabilityDecile Analysis



- Number of Accounts

- Types of Accounts

- Balances

- Channel Usage

- Number of Transactions

- Net Interest Margin

- Fees / Waived Fees



Get these customers to look more like these customers!


Pricing AnalysisRisk-based Pricing


Pricing AnalysisReal-time Account Pricing


Resurgence of Profitability AnalysisAgenda

• Market and peer perspectives

• Why profitability now

• Start with the end in mind

• Best practices

• Practical examples

• Recap and Q&A


Resurgence of Profitability AnalysisSession Objectives

To understand why profitability

analysis has become a focal

point for financial institutions

To provide best practices for

establishing a profitability

analysis framework


Resurgence of Profitability AnalysisFinal Thought

- Agent Anthony DiNozzo, NCIS

IF YOU ALWAYS DO WHAT YOU

HAVE ALWAYS DONE,

YOU WILL ALWAYS GET WHAT YOU

ALWAYS GOT

- Mark Twain- Henry Ford- Tony Robbins


Q&A

Ken Levey: Vice President of Financial Institutions – [email protected]

Bryan Ridgway: Senior Solutions Engineer – [email protected]

the resurgence of profitability analysis in financial ... · pdf filehowever, what passes for...

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