Profitability Solutions Client Profitability January 29, 2014

Transcription

1 Profitability Solutions Client Profitability January 29, 2014

2 Series Overview This is the last in a series of three webinars designed to help you understand the importance of successful profitability reporting: Branch Profitability Sept 2013 Product Profitability Nov 2013 Client Profitability Today

3 Our Presenter: Cheryl Wondrasch Biography: Cheryl has over 20 years of experience with financial institutions. Previously, she held roles in audit, finance, lending / relationship management, and technology. She has worked at $100MM to Several Billion + financial institutions. Over the past 8 years, she has focused exclusively on Profitability (Branch/Product/Client).

4 Todays Session Client profitability: Why should I care? Client profit defined Industry statistic s: How changes in industry have effected key financial measurements. Did you know that 70% to 80% of your clients generate a loss? Want to be able to answer question? Is this the right pricing decision for this client? It s too complicated It does not have to be complicated to be right. Bottoms up vs. top down

5 Client profit definition Profitability measurements at a financial institution: Organization: lowest level of profit measurement is physical / cost center location Vertical view Product: lowest level of profit at product horizontal view Core Branch Service Center Loans 123,929,400 14,157,125 Deposits 182,650,183 26,934,680 Int Inc 649,859 79,592 Int Exp 61,133 8,722 FTP (100,177) (7,105) Margin 488,548 63,765 NII 148,619 38,558 Provision 10,628 2,630 Direct exp 191, ,510 Contribution 435,445 (51,816) Allocations 166,323 46,827 Taxes 75,354 (27,620) Profit 193,768 (71,023) Product Balance Int Inc Int Exp FTP Margin NII Prov Direct Exp Cont Alloc Exp Taxes Profit CD's 77,216,211-28,519 37,389 8, ,870 34,663 (8,770) (17,023) Prem MMK 11,715,860-3,317 16,264 12, ,140 9,052 1,642 2,446 Coml Ln 14,742,337 65,864-25,468 25, , ,523 5,850 10,744 5,929

6 Client profit definition Client Profit Measurement: Which is client? Neither: Client profitability is at the instrument level. It combines application information (loan, cd records) and financial assumptions to arrive at profit per instrument. kee Liquid Inc (ID BAA3074) Acct # Product: Commercial RE Balance Rate Amount Interest Income 1,000, % 4,110 -Amortizing loan fees -Funding Costs 1.25% (1,027) Net Interest Margin 3.75% 3,082 +Transactional loan fees Loan Loss Provision 0.50% (411) Gross Profit 2,921 -Direct Expenses (15) Contribution 2,936 -Overhead Expenses (150) Historical Pretax Profit -Tax Expenses 34.00% (947) Historical Net Profit 1,839 Capital Amount 70, % Cost of Capital 15.00% (863) Value Added 976

7 Industry statistics We are recovering.how to further improve ROE? Increased competition for credit worthy borrowers and their deposits. Changing expense structure / which clients Channel usage and effect on client profit

8 Industry Statistics Overall Performance 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% ROE ROE: Profit or equity driven? Since 2003, equity increased 115%, profit 26%. Shareholders are going to require returns to previous levels. * Source FDIC - FDIC-Insured Commercial Banks 1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% -0.20% ROA

9 Industry Statistics Overall Performance 3.50% Allowance % Total Loans 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 1.74% 1.50% 1.28% 1.15% 1.35% 2.29% 3.29% 3.31% 2.66% 2.16% 0.00% Increased competition for credit worthy clients with their deposits. * Source FDIC - FDIC-Insured Commercial Banks

10 Industry Statistics Overall Performance 80% Efficiency ratio 70% 60% 50% 40% 30% 20% 10% 0% We have become less efficient. In 2003, for every $.50 spent, $1.00 was earned In 2012, it costs $.63 cents to generate the $1.00. * Source FDIC - FDIC-Insured Commercial Banks

11 Banking Transactions (in Billions) Distribution channels, a clients use of their accounts / products effects their profitability.

12 Client profit, why do I care? Do you have enough employees at your institution to meet with every client? Did you know between 120% and 180% of your profit comes from 20% of your clients? Did you know about 70% of all clients generate a loss. What if you focused your officers efforts on the 10% most profitable, and 10% least profitable? Then do you have enough employees?

13 Monthly Profit Client Profit, Why do I care? $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 Protect Improve $0 -$1,000,000 -$2,000, % of Total Profit 173% 10% 1% 0% -4% -5% -7% -7% -9% -51% Profit $4,243,685 $234,923 $23,491 -$5,220 -$92,542 -$128,790 -$163,562 -$176,405 -$228,301 -$1,250,75 Annual Profit/Client $6,921 $387 $37 -$9 -$138 -$205 -$275 -$293 -$358 -$1,854

14 Client profit, why do I care? If you segregate your use of client profit information, you can decrease # of clients and increase profit. Use information in two ways: Specific client retention or improvement Entire client base

15 Client profit: Specific client focus Focus is on individual client s. Client identification as relationship is critical. How to address double count in relationships? Review list determine appropriate count for individual focus given staff availability, size, and process top 10, or top 1,000? Retention plan s or improvement plans.

16 Client Profit: specific client focus Example least profitable relationship report: Loan clients familiar with credit issues. Who is Riley Pellin and why is he in the bottom 1% of profitable clients with deposits only? Only CD s and well priced.

17 Client profit: Entire client base Although 80% of your customers are not profitable, critical to understand majority are at break even or little below. The revenue generated from accounts covers fixed cost at your institution, you need these clients. But you can not afford the client specific efforts.

18 Client Profit Entire client base Widely distribute profit information Client profit becomes more valuable the more it is used and distributed. Core systems: Use ranking for a relative measurement. CRM solutions: Take advantage of house holding by using instrument level profit. Data Warehouse: Add profit as an additional measurement for reporting needs.

19 Client Profit Pricing What is a good pricing result? Consider two approaches: Existing customers improve margin, gross profit, profit, or ROE. New customers set minimal threshold for ROE. Pricing is only one factor in a product offering decision. By having pricing information, you now know the impact of the pricing decision.

20 Client Profit Pricing Example unprofitable customer: $1.7MM in CD balances Annual loss of $10,800, bottom 1% decile in client profitability. Significant deposit balances, no loans. Reprice CD s, add other products, loans, brokerage?

21 It s too complicated On the first level, there is the question of what to include in a measure of a customer relationship, and on the secondary level, the issue of how to measure those items that are included. A balance between theoretical precision and practicality is always necessary. As a result, each portion of a profitability analysis has some controversial features. - By Robert Knight, article on customer profitability from April 1972 Federal Reserve Bank of Kansas City, Monthly Review

22 It s too complicated A profitability solution does not need to be complicated to provide you valuable information. Walk before you run. Your profitability solution will grow with your institution. Accuracy over time. Why profitability solution s fail and what to do to avoid.

23 It s too complicated A profitability solution does not need to be complicated to provide you valuable information. Consider a phased approach to profitability. Start with organization, next product, and finally client. Net interest margin accounts for 80% of a typical financial institution profit. Focus on loan / deposit balances, margin, and funds transfer pricing. Consider the level of precision required for your organization. Client bottoms up approach different than organization and product.

24 Why product performance solutions fail Purchase and implementation: Due diligence was not done prior to purchasing system. What is your organizations financial performance priority? Lack of involvement of senior management during the implementation of system. No communication of how information will be used. Lack of preparation: What do you mean 80% of my relationships are unprofitable? No communication of results.

25 Why product performance solutions fail Ongoing support and oversight: Use of system will evolve over time. Need process to drive this evolution and change. Continued review of assumptions, employee turn over, change in institution strategy necessitate the review of assumptions. If rule assumptions become stale, no buy in to the results. No executive oversight of how the information will be used. Inherently, people do not like to be measured; management needs to clearly communicate how information will be used. Dedication of ongoing staff to support use of information. Once a system is installed, the work is not done; the ROI or value of system comes from using the information.

26 Client profit bottom up approach Client Profit Measurement: Example reconcilement / client to total financial institution. Bottoms up VS. Top Down no balancing Unit GL information not required what? RPM Standard Reports Other Management Reports -- RPM Income Statement Date: Dec-07 Organi [Chesterfield Community Bank] RPM Results Institution Results Variance Comment Loan Interest Income $2,295,023 $2,300,761 ($5,738) -Funding Costs ($1,540,240) $0 ($1,540,240) No FTP total bank +Loan Fees $194,787 $185,048 $9,739 Loan Margin $949,569 $2,485,808 Deposit Funding Credit $1,351,470 $0 $1,351,470 No FTP total bank -Interest Expense ($682,044) ($681,908) ($136) Deposit Margin $669,426 ($681,908) Total Margin $1,618,995 $1,803,901 ($184,906) -Credit Costs ($176,662) ($250,000) Cost of Credit Net Margin $1,442,333 $1,553,901 ($111,568) Deposit Hard Charge Income $148,903 $151,362 ($2,459) Service Income $72,531 $72,531 $0 Product Costs $0 $0 +Direct Expenses $653,989 $968,720 ($46,795) Expense Allocation +Allocation Expenses $267,936 +Tax Expenses $442,897 $323,629 $119,268 Total Expenses $1,364,822 $1,292,349 $72,473 Net Income $298,945 $485,444 ($186,499)

27 How product performance solutions succeed This is how Profitstar ensures a successful installation AND product use: Insist on key stakeholders involvement during implementation. Discuss walk before you run when implementing profitability solutions. Installation not complete until our customers are actively using the information provided.

28 How product performance solutions succeed This is how Profitstar ensures a successful installation AND product use: Ensure understanding of assumptions in model, how to change, how to evaluate changes, and frequency. Encourage a structured management oversight of information. Example, what information would we recommend you provide to board? Continued user education on use s of information.

29 Q&A

30 Thank You Cheryl Wondrasch - ProfitStars 1140 Centre Pointe Drive Suite 800 Mendota Heights, MN cwondrasch@profitstars.com