Projection Strategies in the PROFITstar and PROFITability Programs Using Projection Strategies to Save Time and Improve Risk Analysis

Transcription

1 Projection Strategies in the PROFITstar and PROFITability Programs Using Projection Strategies to Save Time and Improve Risk Analysis Last revised: July 6, 2012 Intended audience: PROFITstar and PROFITability end users This document is available in electronic form at: Summary A projection strategy captures a snapshot of your projection assumptions at the time the strategy is created. Retrieving the strategy at a later time allows you to easily reproduce that projection. In PROFITstar and PROFITability, you can save multiple projection strategies, and then compare them simultaneously on a single screen in the Strategy Monitor. Saved projection strategies can also be examined in variance reports, and in the IRSA and Fair Value matrices. Benefits of using projection strategies include: Workflow optimization simpler processes for comparing different projections More flexibility no need to create new models for sandboxing various options Increased personal efficiency and time savings Improved ability to analyze the tradeoffs between different projection assumptions Promotes better analysis and intelligent decision-making Using Projection Strategies A Hypothetical Example Let s walk through an example of how you might use projection strategies to compare different projections. We ll create three new projection strategies, save them, and compare various aspects of the strategies in the Strategy Monitor. Our starting point is the Projections Data Modeling screen.

2 Building a simple flat-growth projection strategy First, we ll build a status-quo flat-growth projection in the Projections Data Modeling screen. To create this simple projection, we use the Quick Projection distribution action employing the Current Mix % of Total Assets method. The distribution action projects values as follows: Most databank accounts, including standard databank accounts and key rates, are projected flat from the current month of history. Exceptions to this include "Check/Balance" accounts, accounts with key rate ties enabled, accounts set up as product or product-within-organization, and accounts set up with certain Special Account codes. Offering rates remain the same as the current month. All rate-bearing balance sheet accounts maintain the same projected mix that exists in the current month. All non-rate-bearing account balances remain the same as the current month throughout the projection time frames. Non-Interest Income/Expense accounts grow at the same rate as the Databank Total Asset account. Now to save our results as a projection strategy, click the Strategy button, and select Save. We name the new strategy Base Case (Flat Growth). This strategy can be retrieved later for comparison with other strategies. Building an 8% growth strategy with flat rates Next, we ll do another projection, using our newly-created Base Case strategy as a starting point. We perform the Grow by % distribution action on the following accounts: On the balance sheet, grow Total Investments, Gross Loans, and Total Deposits by 8% each. On the income statement, grow Non-Interest Income by 7.5% and Non-Interest Expense by 5.5%. Since we have not changed our databank assumptions, this is a flat-rate strategy. To save the results of our new assumption, we click Strategy, and then Save. We name our new strategy 8% Growth (Flat Rates).

3 Building an 8% growth strategy with a +100 basis point rate shock Now, we ll create a third projection, modeling an immediate 100 basis point rise in rates. For this example, we assume that key rate ties have been defined so that our key rates and offering rates respond appropriately to changes in key indices like National Prime. (In other words, important key rates and offering rates are already tied directly or indirectly to National Prime or other key indices.) So we select National Prime, in Databank, edit the first projected month to be 100 basis points above the current month of history, and project the first month s value flat into all subsequent months. We save a new projection strategy with these assumptions, naming it 8% Growth (+100bp). At this point, we re done creating and saving new projection strategies, and we want to restore our current projection to its Base Case state. To do this, we click Strategy, then Load, and select the Base Case strategy. Now we re ready to start comparing our different strategies. The strategies you compare could be relatively simple (as in our examples) or more complex. Comparing Net Income on the Strategy Comparison tab At this point, we have three saved projection strategies: 1. Base Case (Flat Growth) 2. 8% Growth (Flat Rates) 3. 8% Growth (+100bp) To begin comparing strategies, we click the Strategy Monitor button. After the Strategy Monitor dialog displays, we select the Strategy Comparison tab. At first, only the Base Model-Current projection is displayed as a row in the grid, representing whatever projection we have defined in our Projections Data Modeling screen at the moment. In our example, the current projection is the same as our Base Case (Flat Growth) strategy. We load our three new strategies by clicking on the Add Strategy speed button on the Strategy Monitor toolbar. (The button s graphic has a green + plus sign on a white sheet of paper.) We select all three strategies for loading. They will be added as new rows to the strategy comparison grid. Figure 1 illustrates what our comparison looks like on-screen. Note that, since our Current projection is the Base Case (Flat Growth) strategy, our values in those two rows are identical. However, there are differences in Net Income between Base Case and both of our 8% Growth strategies. Net income for fiscal year 2007 is $1,883,690 in the Base Case strategy, $2,078,124 in the 8% Growth (Flat Rates) strategy, and $2,193,568 in the 8% Growth (+100bp) strategy. We see results for future fiscal years as well.

4 Figure 1: Comparing different strategies on Strategy Monitor s Strategy Comparison tab. The Current projection is the Base Case (Flat Growth) strategy, so the values in the first and the fourth rows are the same. Comparing Financial Summaries and Ratios in the Strategy Monitor Ratios dialog On the basis of our analysis on the Strategy Comparison tab, we decide to take a closer look at two strategies. We want to compare our Current projection (in our example the same as our Base Case projection) with our 8% Growth (+100bp) strategy. We select any cell in the 8% Growth (+100bp) row, and then launch the Strategy Monitor Ratios dialog by clicking on the Ratios speed button (the button with the % percent sign graphic). This gives us a handy way to view Financial Summary and Ratio results for two different strategies side-by-side. Figure 2 shows what the screen looks like. After Strategy Monitor is launched, changes can still be made to the Current projection. If those changes affect Net Income, values for the Current projection in the Strategy Monitor will automatically be refreshed and updated. On-the fly changes to an existing strategy can provide valuable insight.

5 Figure 2: Comparing ratios in the Strategy Monitor Ratios dialog. We can show results for other fiscal years by changing the Fiscal Year End of setting. When we re done with our comparisons, we close the Strategy Monitor Ratios dialog, which takes us back to the Strategy Comparison tab. Comparing Fair Values in the Strategy Monitor Next, we decide to compare Fair Value results for both of our 8% Growth strategies. The Strategy Monitor provides a very handy way to do this on the Fair Value Comparison tab, which we now select. For column 1, we specify the 8% Growth (Flat Rates) strategy, and for column 2, we specify 8% Growth (+100bp). Then we click Load. Figure 3 shows the screen. We ve scrolled down to the loan section of our balance sheet to see how the +100bp rate strategy has affected the fair value of our loan portfolio:

6 Figure 3: Browsing loan accounts in Strategy Monitor s Compare Fair Value tab We observe that for several loan accounts, the 100 basis point rate shock has increased fair value, while others remain unchanged. This view is very convenient for comparing fair values side-byside for two different strategies.

7 Projection Strategies are Temporary Earlier, we learned that a projection strategy represents a snapshot of projection assumptions as they existed when the strategy was created. Some of these assumptions are specified in the Projections Data Modeling screen. Projected volumes and projected key rates are two examples. However, some assumptions affecting projections are actually specified outside of the Projections Data Modeling screen. For example, current-month balances and rates, historical key rates, maturity/repricing, and certain chart of accounts settings can all affect projections, and as such, are part of the assumptions that go into projections. When any of these external assumptions change, all affected projection strategies are invalidated and automatically deleted by the program. In other words, when we make changes in areas other than the Projections Data Modeling Screen, and those changes affect projections, the program will delete any saved projection strategies. The program will warn you in advance if you begin to make changes that would invalidate saved strategies. In particular, be aware that saved strategies are invalidated by moving the month forward. Conclusion Projection strategies provide a convenient way to streamline your analysis of different projections. Strategies are easy to create, retrieve, and compare. Projection strategies, used in conjunction with the Strategy Monitor, are yet another tool the program gives you for intelligent risk analysis and decision-making.