Title: PERFORMANCE MEASUREMENT/PROFITABILITY ANALYSIS
1Financial Managers SocietyNew York-New Jersey
ChapterAll Day SeminarSeptember 14, 2005
- PERFORMANCE MEASUREMENT/PROFITABILITY ANALYSIS
- Organizational/Branch/Line-of-Business/Product/Cus
tomer/Relationship/Market Segment - Funds Transfer Pricing/Cost-Capital Assignment
- Robert E. Kafafian, President C.E.O.
- Office - (973) 299-0300 Ext. 106 Fax (973)
299-1002 - RKafafian_at_KafafianGroup.com
- www.KafafianGroup.com
2Alvin Toffler-Author FUTURE SHOCK, THE THIRD
SHIFT, POWER SHIFT
- Bankers have been saying for years that they are
in the information business .......... but they
fail to realize how deeply they are in an
information business. Bankers also over rate
their ability to use information. -
2
3Robert Slater, Editor BANKERS MONTHLY
- In the business world those that have
information will prosper. Those that dont will
face great obstacles in achieving their goals.
Nowhere is this more true then in the banking
industry. Ironically, much of the information
banks need to compete effectively is already in
their possession. The trick is learning how to
compile it and use it successfully.
3
4Jim McCormick, President First Manhattan Consultin
g Group
- A profitability reporting system that shows
risk-adjusted return on equity by business unit
is essential. Banks should use such management
information systems in strategic planning,
budgeting, risk management, performance
measurement, and incentive compensation. The
best banks, with useful MIS and disciplined
management processes are moving away from the
pack ........ this is no longer optional . -
4
5Richard Bove, Banking Analyst Punk Ziegel Co.,
LP
- MAKE YOUR BANK EASY FOR WALL STREET TO UNDERSTAND
- Specifically, this means each bank must
- Define the markets into which it sells products
- Define the products sold
- Indicate the profitability of product lines
- If investors do not get such information, they
will continue to see banks as undefined packages
of assets. As a result, bank stocks will not
attain high multiples. The prices will reflect
investors feeling that they cannot reliably
predict banks rates of return. -
5
6- EIGHT FUNDAMENTAL MOVEMENTS
- De-Regulation/Re-Regulation
- Asset Liability Management
- Performance Measurement
- Product Diversification
- Service/Sales Culture
- Risk Management
- Industry Consolidation/Convergence
- Technology-Information Management
-
6
7- 1. DE-REGULATION/RE-REGULATION
- Product/Rate
- Industry Mix
- CRA/Privacy
- Gramm-Leach-Bliley Act/ Financial
Modernization Act - Sarbanes/Oxley
- Money Laundering/USA Patriot Act
- Cross Industry/Regulatory Control
-
7
8- 2. ASSET LIABILITY MANAGEMENT
- Balance Sheet Management
- GAP Management
- Interest-Rate Risk
- Focus on remaining maturity
- Front-end to Budget/ Planning Process
- Limited slicing of data
- Limited NIE analysis
- Usually presented at a high-level
-
8
9- 3. PROFITABILITY ANALYSIS
- More detailed analysis of various organizational
components and slices - More detailed expense analysis and breakdown to
the bottom-line - Organizational/Product/Customer
- Relationship/Market Segment
- Focus on original maturity
- Rank/Compare/Trend
- Usable throughout all
- areas of the organization
9
10- 4. PRODUCT DIVERSIFICATION
- Loan Deposit
- Fee-Based
- Trust
- Brokerage
- Insurance
- Delivery Channels
- Internet Banking
- Sales Culture (Trusted Advisor Culture)
10
11- 5. SERVICE/SALES CULTURE
- Cross-Selling
- Products Per Customer
- Service Opportunities
- Sales Opportunities
- Incentives/Disincentives
- Service/Sales Training
- Service/Sales Tools
11
12
12- 6. RISK MANAGEMENT
- Traditional Risk
- Credit-Oriented
- Current View of Risk
- Risk-Adjusted Return
- on Capital (RAROC)
- Types of Risk
12
13- 7. INDUSTRY CONSOLIDATION/ CONVERGENCE
- Financial Services
- Mortgage
- Credit Card
- Brokerage
- Insurance
- Communications
- Technology
13
14- 8. TECHNOLOGY-INFORMATION MANAGEMENT
- Encompasses the Other Six Movements
- Technology Lag
- Sourcing Opportunities
- Information Systems
- Accounting/Marketing/IT
- Delivery Channels
- The Internet
14
15- Keys to Profitability Survival Success
- Marketing effort or study to determine what
products and services do our customers want,
through what delivery channels - Internal analysis to determine what products and
services do we sell that they want in what
combination of delivery channels - ..AT A PROFIT
15
16- PREREQUISITES TO MEANINGFUL
- MANAGEMENT INFORMATION
- Senior managements support
- Reflect managements operating philosophy
- Provide management information, not just
regulatory information - Understandable to the end-user
- Consistently applied
- Provide value as well as benefit
-
-
16
17- MANAGEMENT INFORMATION
- 1. Asset Liability Management
- 2. Budget and Planning Process
- 3. Responsibility Reporting
- PROFITABILITY ANALYSIS
- 4. Organizational Profitability Reporting
- 5. Product Profitability Reporting
- 6. Branch Profitability Reporting
- 7. Customer/Relationship Profitability
Reporting - 8. Market Segment Profitability Reporting
- 9. Opportunity Profitability Reporting
- SUPPORT FUNCTIONS
- 10. Funds Transfer Pricing
- 11. Cost-Capital Assignment/ABC/Performance
Measurement - 12. Data Warehousing/Mining/Mapping/MCIF/CRM
17
18- REPORTING CONSIDERATIONS
- Reconcilable
- Audit Trails
- Ranking Reports
- Comparative Reports
- Trend Reports
- Summary and Detailed Levels
- Macro versus Micro Approach
- Rate/Volume Analysis
- ROA/ROE, Efficiency, Risk Based Capital, etc.
- Peer Group Analysis
18
19- LINE-OF-BUSINESS PROFITABILITY
- Similar and or part of responsibility reporting
- Organization structure - hierarchy table
- Part of, or roll-up of all other profitability
- Financial information about profit centers
- Assessing performance of groups of staff engaged
in profit-producing activity
19
2020
21- TYPES OF PRODUCTS
- Fund Providing
- Demand Deposits
- Savings Deposits
- Time Deposits
- Other Borrowings
- Fund Using
- Investments
- Short-Term Assets
- Loans
- Non-Fund/Fee-Based
- Safe Deposit Boxes
- Mortgage Servicing
- Trust, Insurance, Brokerage, etc.
-
21
22- FUND PROVIDING PRODUCTS
- Fund Providing Products (FPP) are primarily an
accumulation of fund sources or deposits.
Branches typically generate the majority of
deposit products, however, borrowed funds, or
purchased or brokered deposits, are also sources
of funds available to banks. -
22
23- EX FUND PROVIDING PRODUCTS
- Regular Savings Time Deposits
- Statement Savings 0-3 Months
- Money Market 6-12 Months
- IRA Accounts 1-2 Years
- Club Accounts 2-5 Years
- DDA-Individual 5 Years
- DDA-Business CDs 100,000
- Now Accounts Public Funds
- FF-Purchased Other Borrowings
-
23
24- FUND USING PRODUCTS
- Fund Using Products (FUP) are primarily earning
assets, normally consisting of loans or
investments typically found in a special purpose
revenue center, and often consisting of several
homogeneous products. -
-
24
25- EX FUND USING PRODUCTS
- Liquidity Portfolio Commercial-Fixed
- Investment Portfolio Commercial-Floating
- Fed Funds Sold Commercial-Adjustable
- Mtg-Adjustable Commercial-SBA
- Mtg-Fixed Home Equity
- Mtg-Commercial Second Mortgages
- Consumer-Auto Overdrafts
- Consumer-Personal
- Consumer-Floor Plan
-
25
26- NON-FUND/FEE-BASED PRODUCTS
- Non-Fund Products (NFP) generally have only
incidental balances. The sole source of revenue
for these products is typically fees for
services. -
26
27- EX NON-FUND/FEE-BASED PRODUCTS
- Trust Services Safe Deposit Boxes
- ATM Services Brokerage Services
- Secondary Market Mortgage Servicing
- Travelers Checks Series E Bonds
- Checkbook Services Insurance Services
-
27
28- CUSTOMER PROFITABILITY
- Account Level Profitability
- Individual Relationship Profitability
- Extended Relationship Profitability
- Market Segment Profitability
-
-
28
29- MARKET SEGMENT PROFITABILITY
- WWII Generation (65 and Over)
- Swing Generation (56-64)
- Baby Boomers (33-55)
- Generation X (19-32)
- Baby Boomlets (Under 19)
- Other Categories (Empty Nesters, DINKS, etc.)
-
-
29
30- MCIF-MARKERTING CUSTOMER INFORMATION FILE
- Connectivity of Data
- Matching Markets/Products/Sales/Service
- Market Demographics
30
31- CRM-CUSTOMER RELATIONSHIP MANAGEMENT
- Contact Information
- Sales and Service Tracking
- Performance Measures
31
32- MINING AND MAPPING DATA
- Where are the opportunities?
- Where should the focus be?
- Geographic
- Customer type
- Advertising/marketing/promotion/sales and service
32
33- PROFITABILITY EMPHASIS
- CMTY
- BKS MEL
- Fund Using/
- Fund Providing
- 83 Products 31/15
- - - - - - - - - - - - - - -
- Interest Income/
- Interest Expense
- Non-Fund Products
- 17 - - - - - - - - - - - - - -
69/85 - Non-Interest Income
-
33
34- FUNDS TRANSFER PRICING
- Single Rate/Pool
- Specific Matching
- Multiple Pool Matching - Actual Cost of Funds
- Matched Maturity Coterminous
-
34
35 Asset Spread
Total Interest Spread
Treasury Spread
Liability Spread
Data Warehouse/ Funds Transfer
Pricing
General Ledger
Other Databases
Loans Deposits Securities
35
36- Cost Basis CQTR LQTR DIFF
- Interest Income 7.81 7.75 0.06
- Interest Expense 3.45 3.43 0.02
- Net Spread 4.36 4.32 0.04
-
36
37- Market Basis CQTR LQTR DIFF
- Fund Using
- Interest Income 7.81 7.75 0.06
- FTP-Charge 6.25 6.15 0.10
- Spread 1.56 1.60 (0.04)
- Fund Providing
- FTP-Credit 6.11 6.07 0.04
- Interest Expense 3.45 3.43 0.02
- Spread 2.66 2.64 0.02
- Maturity Gap 0.14 0.08 0.06
-
- Net Spread 4.36 4.32 0.04
37
38- Cost Basis CQTR LQTR DIFF
- Interest Income 7.81 7.75 0.06
- Interest Expense 3 45 3.43 0.02
- Net Spread 4.36 4.32 0.04
- Market Basis CQTR LQTR DIFF
- Fund Using
- Interest Income 7.81 7.75 0.06
- FTP-Charge 6 25 6.15 0.10
- Spread 1.56 1.60 (0.04)
- Fund Providing
- FTP-Credit 6.11 6.07 0.04
- Interest Expense 3.45 3.43 0.02
- Spread 2.66 2.64 0.02
- Maturity Gap 0.14 0.08 0.06
38
39- TRANSFER PRICING-
- PRODUCT CHARACTERISTICS
- Original Maturity
- Stated Maturity
- Stated Repricing
- Duration
- Cash Flow
- Blended Rate
-
39
40- CURVES
- Treasury
- FHLB
- Swap
- LIBOR
- Build
- Other
- Supplemental Margins
-
40
41- SUPPLEMENTAL MARGINS
- Incremental Margins
- Market Risk
- Credit Risk
- Risk Based-Capital
- Prepayment Penalties
- Early Withdrawal Penalties
- Other
-
41
42- HIGHLIGHTS OF MATCHED MATURITY
- Places focus on original maturity, duration,
cash-flow, or blended rate - Levels playing field by consistently pricing to
market driven indices - Isolates fund using, fund providing, and treasury
responsibility and contribution - Induces managers to make incremental decisions
- Forces managers to actively manage interest
spread - Enables management to assess true profitability
for each product and line-of-business - Illustrates effects of changes in product mix
within lines-of-business - Identifies negative and positive trends, problems
and opportunities - Permits easier comparisons to industry/peer
groups
42
43 Marginal Contribution CDs One
Year Maturity
43
44 Marginal Contribution CDs One Year Maturity
44
45 Marginal Contribution CDs One Year
Maturity
45
46 Marginal Contribution CDs One Year
Maturity
46
47- PERFORMANCE MEASUREMENT-
- COST/CAPITAL ASSIGNMENT
- Activity-based-costing
- Full absorption versus standard costing
- Variable/fixed-direct/indirect costs
- Isolating efficiencies/inefficiencies
- Capacity utilization
- Allocations methodologies
- Average balances
- Fixed percentages
- Statistical databases
- Regulatory/Risk-Based Capital
- Internally developed capital assignment (RAROC)
-
47
48 E I S
Organization Profitability
Ad - Hoc Profitability
Product Profitability
Customer Profitability
Opportunity Profitability
ALM
MCIF
Data Warehouse/ FTP
Funds Transfer Pricing
Cost Allocation
Interface Engine
General Ledger
Other Databases
Loans/Deposits/Securities
48
49- OVERALL OBJECTIVES OF MIS
- Assist in strategic decision making and the
budget process - Provide information to manage GAP, Organizational
Units, Products, Branches, Customers,
Relationships, Market Segments, Exposures, etc. - Assist in the measurement of performance (i.e.,
units/people) - Assist in the determining of performance rewards,
i.e. compensation, bonuses, incentives - Provide the detail to understand and evaluate
complex issues and problems - Remembering the 80/20 rule ..... Get enough
information to be accurate ..... not all
inclusive information, which can cause needless
complexity and sometimes misleading results -
-
49
50- MEASURING AND ACHIEVING SUCCESS
- Develop meaningful management information to make
more informed decisions and manage riski.e., the
users use the system - Productivity will be increased
- Performance should be rewarded
- The Bottom-Line is improved
- All constituencies are satisfied
-
-
50
51Financial Managers SocietyNew York-New Jersey
ChapterAll Day SeminarSeptember 14, 2005
- PERFORMANCE MEASUREMENT/PROFITABILITY ANALYSIS
- Organizational/Branch/Line-of-Business/Product/Cus
tomer/Relationship/Market Segment - Funds Transfer Pricing/Cost-Capital Assignment
- Robert E. Kafafian, President C.E.O.
- Office - (973) 299-0300 Ext. 106 Fax (973)
299-1002 - RKafafian_at_KafafianGroup.com
- www.KafafianGroup.com