If you’re a CEO, CFO or other senior leader in banking, are the decisions being made by finance professionals at all levels aligned with driving profitable growth and shareholder returns? Often there can be a disconnect, with teams leaning too heavily on ALM or budgeting and with a lack of tools to assess risk-adjusted profitability.
In a recent webinar, Empyrean Director of Finance and Risk Will Newcomer shared his experience implementing profitability analytics systems years ago to better synchronize decision making across his banks. Here are some of the key insights he provided:
The Aspirational Trap
Traditional tools like asset/liability management (ALM) systems and budgeting processes are great for modeling scenarios and defining plans. However, they are fundamentally aspirational – projecting what you want or think will happen based on assumptions.
What’s missing is a fast feedback loop on what is actually happening as deals are booked and transactions occur. This reality can quickly diverge from even the best-laid plans and budgets as depositor behaviors and market conditions change.
Instrument-Level Profitability Truth
Profitability systems resolve this by calculating fully risk-adjusted profitability at the instrument level across all revenue, expense, capital, and funding components. This illuminates the true contributions and returns from each customer, product, organizational unit and more.
With this transparency, you can identify promptly where problems are emerging like key customers reducing the size of their relationship, operational costs outpacing revenue growth, or excessive risk concentrations. Just as critically, you can replicate profitable behaviors occurring only in siloes across your financial institution.
Aligning Leadership and the Front Line
By incorporating these profitability metrics into reporting and decision processes, you can better align frontline decisions with the overall profitability goals driving leadership’s strategies. Will related how his CEO wanted finance professionals “making decisions like I would make them.”
Improved Governance and Results
By reviewing actual profitability results frequently, management committee discussions became more collaborative and focused on actions to improve returns rather than turf debates. Investing time aligning incentives, policies and organizational accountability to profitability measures paid off.
In Newcomer’s experience, “Communications improved, modeling improved, and most importantly, our earnings and the returns improved to the shareholders.”
Today’s Profitability Imperative
Newcomer noted a resurgence of interest in profitability analytics amid the recent industry volatility, higher interest rates, inflation pressures and intense competition to optimize profitability and shareholder value.
With customers exhibiting lower friction to move deposits and relationships, having rapid insight into your most profitable and at-risk customers is more crucial than ever. Frontline teams empowered with spread management tools and aligned compensation can better defend these relationships through intelligent pricing.
Especially in turbulent times, having transparent profitability insights replacing operational blind spots ensures your frontlines stay synchronized with executives’ risk adjusted profit maximization objectives. Ultimately, it equips everyone to make better decisions driving sustainable growth in shareholder returns.
Empyrean Solutions is the trusted solution for banks and credit unions looking for an intuitive and fast approach to risk management, budgeting & planning, and profitability. Interested in learning more?