Industry Insights: Profitability

May 6, 2019
The Road to Higher Profits
By Alec Hollis, Director, ALM Strategy Group, ALM First Financial Advisors, LLC

Banks want to achieve above-average profitability. Profitable growth is a critical element to success as an organization. Long-run commercial viability occurs when an organization delivers value to its constituents in a profitable and sustainable manner. But how do banks get that way? Are there distinguishing characteristics of high-profit banks?

The year 2018 was a blockbuster one for the banking industry, thanks in large part to the Tax Cuts and Jobs Act (TCJA). The industry earned $236.7 billion in 2018, a whopping 44.1% improvement over the $164.3 billion in 2017, and return on assets (ROA) was 1.35% – its highest point in over seven years. According to the FDIC’s Quarterly Banking Profile, the 44.1% increase in full-year net income would have only been an estimated 13.5% given a normalized tax rate.

Drawing conclusions from the FDIC’s published data, it’s clear that asset size is a factor to profitability. Medium and larger banks have a much higher profit advantage over smaller banks. For example, banks under $100 million in assets have a ROA disadvantage of 33 basis points (bps) to the industry’s 1.35%, much of which can be attributed to scale that results in greater efficiency. However, the discussion of size and performance recalls the chicken-and-egg conundrum; or as statisticians would put it, correlation does not imply causation.

The effectiveness of an institution’s management team shapes its performance, and hence its size. Growth for the sake of growth is no substitute for profits. The wrong incentives related to growth could lead to uncontrolled increases in operating expenses and a loss of a competitive advantage. Rather, management teams should focus on delivering value in a profitable manner. Growth then becomes a natural byproduct, which can bring scale and further improvements in efficiency.

To view performance outside of the traditional confines of asset size, we created a bank screener to profile high-profit banks. To start, we filtered out the largest of banks, removing banks above $20 billion in assets and other unrepresentative specialty banks.

From there, our high-profit benchmark (HPB) contains banks with the following criteria:
- ROA and ROE higher than the industry in four out of the past five years
- A higher ROA today than five years ago
- Non-performing assets not greater than 1.20% of assets (double the industry’s aggregated figure)

Of the 5,406 institutions reporting according to the FDIC, 575 banks were included in the HPB, representing about 11% of the total number of banks. These are institutions without excessive credit losses and a strong track record of performance over the past five years. The asset size distribution is very similar to the broader industry, indicating high-profit banks across all asset sizes are represented. However, the skew is more towards the larger side, as the average asset size is $873 million in the HPB compared to $670 million on average for banks less than $20 billion in assets. In our findings, the factors these high-profit banks share are expense control, leverage and balance sheet structure.

How High-Profit Banks Do It
Expense control is one factor that leads to higher profits, and arguably the most important one. Operating overhead stands out as the most statistically significant factor in profitability, as HPBs posted 2.57% of average assets in non-interest costs and a 50.38% efficiency ratio – both significantly lower than the numbers of their similarly-sized peers. HPBs also have lower interest costs and higher net interest margins (NIMs). On the other hand, non-interest income and fee income don’t seem to be key factors; HPBs seem to earn less in these diversified sources of income relative to larger banks. Overall, HPBs outpaced the broad industry by a wide margin last year, generating a 1.81% ROA and 16.03% ROE.

Leverage also stands out, but more so when comparing to banks on the smaller side. Larger banks tend to make better use of economically cheaper debt relative to high-cost owners’ capital. Interestingly, HPBs have higher capital ratios than the broader industry – including the largest banks – but risk-based capital ratios are about the same. This indicates HPBs are more likely to utilize risk-based capital, which leads us to the next point.

Balance sheet structure influences performance, at least for the time being when credit performance is strong. Loan-to-deposit and loan-to-asset ratios are significantly higher than the broader industry. HPBs also have higher deposit-to-asset ratios, perhaps giving them a cost of funds advantage.

Ultimately, profitability is a result of many factors. Market forces are certainly a big part of this discussion – once again, think back to 2018’s tax tailwind. A bank’s financial statement performance, however, suffers from the drawback that it is not risk-adjusted. That is the purpose of asset-liability management (ALM) – to increase profits by reducing risks that may adversely impact profitability. Should market forces move unfavorably, efficient, well-run banks will be the best positioned to survive.

Figure 1: The Index of High-Profit Banks Compared to the FDIC's Compiled Data

Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of the Financial Managers Society.

About the Author

As a Director for the ALM Strategy Group at ALM First Financial Advisors, Alec Hollis performs asset liability management strategy research for financial institutions, implements firm-wide ALM modeling procedures and assists in the execution of client balance sheet hedging programs.

October 15, 2018
Strategic Uses for Customer Profitability
By Brad Dahlman, Sr. Product and Consulting Services Manager, ProfitStars

As accounting/finance professionals, we spend the majority of our time focused on delivering accurate financial reporting, but less time determining how the information will be used by the business units tasked with driving the institution’s success.

As a result, accounting/finance managers often want to have deep conversations about Funds Transfer Pricing (FTP) methodologies or the benefits of full absorption costing rules. While having good business rules is key to providing accurate results, it is equally important to focus on how front-line employees should be using customer profitability data to effectively drive business decisions..

Identification and Protection of Key Clients
In the more than 100 customer profitability installations I have overseen, it has been universally true that over 180% of a financial institution’s profitability comes from the top 20% of clients. This dramatic concentration of profit among relatively few clients demonstrates the importance of identifying these key clients and putting in place strategies to ensure they never leave your institution. While most well-run institutions have a good idea of who many of their top clients are, there are always some surprises – especially with deposit/service clients that don’t go through credit underwriting processes.

In Figure 1, a well-performing $800-million bank shows average profitability for each client in the top 10% as $4,623 annually. Losing any of these clients will certainly hurt, so the organization must:

1. Identify them
2. Assign relationship officers to these key accounts
3. Put in place programs or rewards to ensure the client is satisfied, including providing key profit information to tellers and personal bankers so they can properly address fee waiver requests
4. Track lost “key” clients

Figure 1: Profit Is Highly Concentrated

Effectively Pricing New Transactions
The second use for customer profitability data is in pricing new transactions. As new business requests (loan or deposit) are considered, institutions with a customer profitability system should:

1. Understand current profitability (i.e. “before”)
2. Price the new transaction, considering various pricing scenarios and terms
3. Assess the “after” – or post-approval profitability – to ensure an adequate return (profit/ROE)
4. Provide only those options to the client that meet targeted profitability thresholds

Segmentation and Marketing Strategies
The third major use for customer profitability data is by the marketing department. Accurate customer profitability data is often loaded into CRM/MCIF systems, as opposed to using rudimentary CRM/MCIF tools to determine profitability. With this accurate data imported into the application, the data is then used to segment clients and develop marketing campaigns targeted around both product usage and profitability data.

While many CRM/MCIF systems have basic profitability analysis included, it is essential to have one consistent view of profitability for use by finance/business leaders, tellers or other front-line personnel, as well as marketing. As such, data from a sophisticated profitability system should ideally be fed into the CRM/MCIF system.

Evaluation of Relationship Managers’ Performance
The fourth major use for customer profitability data is evaluation of relationship managers’ performance. The concept here is to determine the value of a relationship manager’s portfolio at the beginning and end of the year to assess profit improvement.

In most institutions today, relationship manager goals often revolve around production goals like growing loans and/or deposits. While growth is indeed a positive measure, we also want to make sure these goals align with profitability goals. Without profitability targets, relationship managers will be incentivized to simply “price down” transactions to win business that could negatively affect the institution’s overall financial performance. In other words, not all deals are profitable!

When a relationship manager has profitability growth goals, he or she is encouraged to find ways to make transactions profitable. Access to customer profitability data and effective pricing tools are key elements in this process.

Customer profitability systems have been available in the market for many years. However, the number of financial institutions that have accurate, sophisticated customer profitability systems and use them in the manners described above are few.

In my experience, community bank clients who actively use their customer profitability systems have experienced between 8-10 basis points of additional profitability over their peers. As your institution considers future growth and profit objectives, it is therefore worth asking this basic question: “Do we provide our front-line staff with the information to effectively engage with clients to grow profitability?”

If the answer to this question is “no,” perhaps 2019 should be the year your organization explores customer profitability and pricing solutions.

Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of the Financial Managers Society.

About the Author

Brad Dahlman is a Senior Product and Consulting Services Manager for ProfitStars focusing on the importance and uses for relationship profitability. In addition to developing a customer profitability system in the late 1990s, Brad has personally led the installation of customer profitability solutions at over 100 financial institutions over the past two decades. He has a broad background in banking and has held various positions in finance, audit, operations and technology with several mid-sized community banks.

December 5, 2017
Can Risk Management Be Profitable?
By Alec Hollis, Director – ALM Strategy Group, ALM First Financial Advisors, LLC

As regulated as the banking industry is, risk management can seem like a “check-the-box” activity. In a great piece titled “The Profitable Side of Risk Management,” Michael Giarla rejects the perception of risk management as a necessary evil that detracts from bank profitability, and instead promotes the idea that proper risk management is an important factor to an institution’s success. While overregulation certainly is a hot topic today, proper risk management remains a timeless element in long-run profitability.

Central to most risk management programs is managing interest-rate risk (IRR), although strategies to manage and target this risk vary across the industry. Ultimately, an institution’s tolerance for IRR is set by its board. Given that some institutions are comfortable operating with higher levels of IRR than others, it’s worth asking whether higher levels of IRR are correlated with higher levels of profitability.

The answer is not so straightforward. There are many other, more material factors driving long-run profitability, such as lending standards and cost management. As such, one can see IRR management not so much as a profit center, but as a natural hedging response of a business focused in financial intermediation. Great institutions have strong risk governance programs in place, allowing them to scale and grow in a safe manner, and continue to do what they do best – serve their customers and their institutions without betting on interest rates.

As with any risk management program, minimizing risk isn’t a valid goal, all else equal. Risk avoidance can create shortfall risk, which can be detrimental to profitability. Instead, asset-liability management (ALM) programs should focus on quantifying risk and managing it to ensure the institution is making informed decisions. Ultimately, earning adequate reward per unit of risk is the name of the game. High-performing institutions often do this by integrating risk management with strategic planning, through the development of new products, services and processes.

High-performing institutions are also very aware of the current profitability and risks of their product lines. As the old saying goes, “a bank’s assets are its liabilities, and its liabilities are its assets” – meaning a stable cost of funds is a valuable asset, and credit concerns stemming from the asset side can bring a bank down. Having superior expertise in managing credit risk is extremely important to long-run profitability, which is why many institutions rely on risk-adjusted return on capital analysis.

Keeping track of all the risk-adjusted analysis acronyms might be harder than understanding the techniques themselves – RAROC, RORAC and RARORAC to name just a few. But despite the potential confusion, the goal is to get to a risk-adjusted return on allocated capital, which can in turn help the institution become a better capital allocator.

When making capital allocation decisions, capital is best allocated to its most efficient use. Efficiency is an idea discussed in modern portfolio theory, and one that applies to building a balance sheet. The general rule is that for any two investments (capital allocation decisions) with the same level of risk, the institution should choose the option with the higher expected return; conversely, given the same expected return, the investment with lower risk should be chosen. Additionally, the investment’s risk-adjusted expected return – adjusted for the associated marginal operating and credit costs – should exceed the marginal financing costs of the institution.

The table above shows a return on capital comparison of three potential investments – two loans and a securitized product. Despite the disparity between the three assets, all potential investments should be boiled down to their marginal impact on return on allocated capital to allow for cross-comparison. While an asset may have a lower gross yield, it may demonstrate a higher return on allocated capital after accounting for its risk-adjusted expected return, its marginal costs and its leverage resulting from the required capital allocation.

Such is the case in the following hypothetical example – the agency CMBS product has a lower yield than the auto loan, but after adjusting for expected credit cost, operational expense and capital allocation, it ultimately has a higher return on capital. Just as one shouldn’t judge a book by its cover, don’t judge an asset by its yield.

Risk management is important for many reasons, and shouldn’t be reduced to a regulatory task or seen as solely playing defense. To the contrary, proper risk management can provide CFOs and management with the confidence needed to support a robust offensive strategy. As history has shown, crises come and go – risk management should serve to protect the institution from the fluctuations of the business cycle, which is why risk-adjusted product profitability analysis is paramount.

Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of the Financial Managers Society.

About the Author

Alec Hollis is a Director in the ALM Strategy Group at ALM First, where he performs asset-liability management strategy research, implements firm-wide ALM modeling procedures and helps execute balance sheet hedging programs for financial institutions

AUGUST 16, 2017
Building an Optimal Investment Portfolio
By Robert B. Segal, CFA, Atlantic Capital Strategies, Inc.

Bank investment portfolios are an increasingly important part of balance sheet management. As portfolios have grown by 5.9% over the past year, according to the FDIC, they also produce a larger share of earnings. However, regulatory challenges and the low interest rate environment have pushed some into lopsided positions, such as high concentrations of agency notes and collateralized mortgage obligations (CMOs), with those institutions dealing with what are now sub-optimal portfolio allocations.

These investment portfolios show heightened risk exposures, whether through maturity extension, early call features or declining levels of income – less palatable sources of risk in an industry currently focused on improving earnings. In order to boost long-term performance while mitigating risk, investment officers should keep an eye on the following key areas.

Target Duration
Investment policy statements describe the framework by which the institution manages its portfolio. One goal is to enhance profitability within the overall asset/liability management objectives, while a second aim is to establish a process for implementing specific measures to manage sensitivity to interest rate changes.

Accordingly, management should establish a target level of duration that reflects the institution’s asset/liability position, income requirements and risk tolerance. Academic studies consistently show that longer-duration portfolios provide higher levels of income. At the same time, highly-leveraged institutions need liquidity to fund loans, and this may reduce the desired level of price sensitivity, causing the investment officer to “shorten-up.”

Maintaining duration, moreover, is an essential factor in preserving margin and maximizing net interest income. As portfolios age, duration can decline unless cash flows are reinvested back out on the curve; this “opportunity cost” limits earnings potential. Similarly, portfolios comprised exclusively of mortgage securities can extend if prepayments lag initial projections, creating unexpected interest rate risk. Investment officers should closely monitor their portfolios and take steps to ensure target durations are preserved to protect net interest income.

Many portfolios become heavily weighted toward certain “comfortable” sectors. The returns fixed-income investors receive are determined by various factors, such as volatility of rates, credit and yield curve slope. An emphasis on callable agencies, for example, implies a reliance on returns from taking extension risk or prepayment risk.

With an expected drop in market rates, this institution will receive unwanted funds which must be reinvested at lower yields. Conversely, calls slow down in a rising-rate environment, providing less cash to put to work at better yields or to fund loans. A diversified portfolio (more call-protected assets, in this case) would keep cash flow fluctuations to a minimum, leading to improved portfolio performance.

Cash Flow
It is recommended that the treasury group prepare cash flow projections in a base case, as well as several alternate scenarios. An institution exposed to mortgage security prepayments, for example, can act in advance to protect against a decline in income in a falling-rate environment by either pre-investing or realigning the portfolio. The cash flow projections provide the information necessary to understand the position and evaluate suitable strategies, with the ultimate goal of establishing an optimal cash flow profile.

Bond Ladder
A laddered portfolio consists of securities that mature in successive years, starting in the short term and extending out to five years or longer. Assembling a stable basket of cash flows avoids locking in all one’s funds at “low” yields, while enabling the investor to pick up some additional income.

The benefit of a ladder is that as rates move higher, bonds coming due in the near term can provide funds for reinvestment when the alternatives may be more attractive. Depending on the institution’s preference and individual situation, the principal can be put to work at the desired maturity. If current yields are higher than the bonds rolling off, the institution is able to increase overall returns, boosting portfolio performance.

Fixed vs. Floating
Many investment officers wonder about the optimal strategy for deploying assets – whether to put on longer-term fixed-rate investments that pay a higher coupon or add floating-rate instruments that would benefit if rates rise. The investment officer might be considering two options: a five-year fixed-rate note yielding 2.4% or a similar term floating-rate bond priced at 90-Day LIBOR (1.3%) plus 50 basis points, for a current yield of 1.8%.

If the market forecast is correct, then the yield for the floating-rate bond will increase 25 basis points in September 2018 and a similar amount the following year – bringing the yield to 2.3% at September 2019. By contrast, the institution will have received a constant 2.4% for the fixed-rate option. Assuming a $1 million investment, the fixed-rate bond provides interest income of $72,000 over the three-year time horizon, compared with $65,250 for the “floater.” Even as the yield curve has flattened, fixed-rate assets may still provide higher levels of current income than floating-rate alternatives in the intermediate term.

Best Execution
In light of recent advances in technology, regulatory agencies such as FINRA have reiterated their commitment to ensuring best execution as a key investor protection requirement. FINRA stated in a November 2015 regulatory notice, for example, that the market for fixed-income securities has evolved significantly and transaction prices for most securities are widely available to market participants.

Broker/dealer transaction costs can vary greatly based on the scope of the transaction and access to the most liquid dealers. For example, the Bid-Ask Spread Index from MarketAxess shows that block trades on actively traded corporate bonds currently have a 3-basis-point bid-ask spread, and “odd lots” trade at 7 basis points. Individual transactions often trade at higher spreads, indicating that investors may be “leaving money on the table.” A more diligent approach toward trading efficiencies could help support the bottom line.

Municipal Bonds
Banks have boosted their holdings of municipal bonds steadily over the past decade, according to Federal Reserve statistics. Industry reports generally show that institutions holding larger percentages of municipal bonds tend to be the high performers, and banks holding at least 30% of their investment portfolios in munis are typically found in the first quartile for investment yield.

A primary benefit of municipal bonds is the long period of call protection. Bank treasurers may be relatively certain they’ll hold on to the initial yield for seven to ten years, regardless of interest rate movements. With considerable optionality on most bank balance sheets, municipals provide much-needed predictable cash flow. In addition, the municipal curve remains steep, providing some price protection for a rising-rate environment.

The Bottom Line
Taking some of these steps may enable management to build more efficient investment portfolios that generate higher levels of income over time. Building predictable cash flow characteristics provides the flexibility to manage the portfolio effectively within the context of the balance sheet, while also leading to stable returns.

Of course, the institution should consider its asset-liability position when making these decisions. Investment officers should also continue to maintain robust risk management practices, keeping interest rate risk exposure at reasonable levels.

Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of the Financial Managers Society.

About the Author

Robert B. Segal, CFA, Atlantic Capital Strategies, Inc.
Robert B. Segal is the founder and CEO of Atlantic Capital Strategies, Inc., and has over 35 years of experience in the banking industry, having worked in several community banks with roles in mortgage banking, sales and trading and asset-liability management. Bob is also currently a Director-at-Large on the FMS Board of Directors.

May 24, 2017
Five Ways to Unlock the Full Value of Loan Review 
By  Ancin Cooley, Principal, Synergy Bank Consulting and Synergy Credit Union Consulting

If you grew up north of the equator, you can probably remember the excitement you felt playing in the freshly fallen snow each winter. As you bounded toward the front door, ready to throw yourself into a fluffy pile of wintertime fun, you were stopped by a parent, ready to burden you with a heavy coat, gloves, scarf and hat. As the layers piled on, you wondered who could possibly have fun in all of this. However, once outdoors, you realized that your protection made the snowy adventure even more enjoyable.

A similar analogy can be drawn about loan review. Attempting to quickly grow your loan portfolio or move into new areas of business without a fully functioning loan review program is like trying to play in the snow without a coat on. You’ll never enjoy the snow if you’re not equipped to withstand the freezing temperatures that will undoubtedly accompany it. Likewise, you’re unlikely to see the sustained growth you seek for your institution if you fail to implement key processes that protect you from the imminent pitfalls associated with growing or integrating a new loan product.

Even the most conservative institutions pin growth and profitability as primary goals. However, in order to maintain healthy growth, institutions must keep a reliable pulse on the performance of their loan portfolio and accompanying credit risk issues. Effective loan review keeps that pulse by consistently monitoring the risk management function. With a strong loan review department to keep things on track, the institution will have the freedom to explore new products and industries with confidence.

If it’s true that loan review is the key to monitoring risk, then where was it during the last major downturn? Amid the slew of potential issues that crippled loan review and lead to the last downturn, these primary issues took precedence, and in many cases their continued presence is still putting institutions in jeopardy:
- Insufficient analysis to support the risk rating
- Failure to document major issues and the answers leading to their conclusion
- Failure to discuss credit administration weaknesses
- Insufficient numbers and experience of staff
- Failure to discuss and address portfolio risks
- Organizational and hierarchical missteps
- Lack of follow-up

Today, commercial real estate levels are back to where they stood pre-downturn. Institutions that have a strong early warning system – built by loan review – are able to identify and remediate problems faster.

Once your institution realizes the full value of the protection offered by a high-functioning loan review team, you may actually look forward to having an independent group of professionals hand you a pair of gloves, fit you with a coat and wrap you tightly in a scarf before sending you off to your next deal. To make sure your institution is getting the full value out of its loan review process, be sure to pay close attention to these five practices:

Craft a Risk Appetite Statement
The risk appetite statement helps your institution determine the direction of its lending program in an effort to grow more intentional portfolios that will bolster its overall health. When crafted as part of your yearly strategic planning process, your institution will be primed to grow portfolios by aligning your goals with your unique risk appetite.

This statement serves as a crucial guide by outlining the institution’s risk appetite, risk capacity and risk profiles, driving your institution’s decision-making over the next year.

While risk appetite refers to the amount of risk your institution is willing to accept in pursuit of loan growth, risk capacity quantifies the maximum risk that the firm is able to withstand. Risk capacity is based on metrics like capital, liquid assets and borrowing capacity, among others. Target risk profile represents the allocation of appetite to risk categories (e.g., how many home equity or car loans you will grant?). Actual profile represents risks that are currently assumed.

When gathering information that will eventually become the risk appetite statement, it’s important to engage with and incorporate the input of parties such as the board, CEO, CFO, lenders and internal auditors.

Align Loan Review with Risk Monitoring
For some institutions, this maxim is already a no-brainer. While past industry-wide practices have placed loan review within the purview of internal audit, forward-thinking institutions are making the shift toward aligning loan review with risk management. In fact, loan review is increasingly being referred to as credit risk review, thus highlighting the shift in thinking about the functionality of loan review.

When loan review is repositioned within the organization’s hierarchy, this seemingly small organizational shift can have a seismic effect on the overall effectiveness of the loan review function. This is achieved through utilization of independent authorities that perform candid, unbiased reviews.

Put simply, a loan reviewer must be able to safely “speak truth to power.” The reporting structure should be organized in a manner that allows for both the formulaic testing and critical, open-ended examination allowed under risk management.

Further, compensation levels are another key component of loan review effectiveness. Because the loan review position is critical to the success or failure of a financial institution, the institution must hold it in esteem for internal controls and for external appearances. By providing loan reviewers a proper place in the hierarchy of the organization, the institution communicates the seriousness and intrinsic value of the loan review position and its responsibilities.

Apply Strategy to Price Monitoring
A “one size fits all” approach just doesn’t work in the land of lending. Building a strategic pricing system through close monitoring of loan administration is critical to maintaining a healthy portfolio.

Even after a borrower has been with you for some time, things like credit worthiness, collateral values, and deposit balances all change over time, requiring a change in strategy on the part of the institution. Utilized fully, your loan review department can help keep an eye on these many changes and help steer the institution toward the best set of solutions.

Hone In on Small, Targeted Reviews
While broad, sweeping reviews are seemingly effective, getting down into the devilish details can expose smaller issues before they become significant problems. Specifically, performing deep dives into your appraisal management, special asset and loan administration function create tangible value and ROI.

Perform Post-Mortems on Large Charge-Offs
There really is no better vision than hindsight. Looking at your largest losses incurred over the last three years will allow you to identify whether there are any core themes that recur throughout. When armed with knowledge about what hasn’t worked, you can mitigate similar losses in the future. This is undoubtedly a best practice.

Before implementing these practices, make sure they are codified in a strong loan review charter or policy that is signed by the board of directors. Memorializing these practices solidifies loan review as a strategic asset, and equips the loan review team to objectively and independently unlock the strategic value of loan review.

Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of the Financial Managers Society.

About the Author

Ancin Cooley, Principal, Synergy Bank Consulting and Synergy Credit Union Consulting
Ancin Cooley is the Principal of Synergy Bank Consulting and Synergy Credit Union Consulting, both of which specialize in loan review and strategic planning.  He can be reached at

May 17, 2017
Top Five Attributes of High-Performing Institutions   
By  Danny Baker, Vice President – Market Strategy, Financial and Risk Management Solutions, Fiserv

Executives, employees, customers and shareholders want it all when it comes to the management of a financial institution – high growth, profitability and efficiency. Financial managers know that there is a delicate balance required to achieve strategic growth while managing expenses, but high-performing financial institutions are successfully able to walk that line every day.  

Every organization can learn from top performers, including understanding where and why they win and what drives their profitability. What do they do better than others to balance growth with efficiency? Working with a group of industry-ranked, high-performing Fiserv clients on a daily basis and observing their challenges, opportunities and best practices, we have found that these institutions shared five differentiating attributes.

1. Forward-Looking Management
So many economic variables can affect a financial institution's future, and high performers successfully assess those factors, run multiple future scenarios and manage to those possibilities. If things change, they can more quickly understand the effects and make appropriate adjustments. Assumptions about the future underpin predicted strategies, including long-range plans and budgets. Instead of simply taking a historical view – or looking at what's happening right now – high-performing financial institutions constantly review forecasts and future scenarios to better assess their environment, customers, market and competition.

2. Strategic Planning Discipline
A good strategic process relies on data analytics and scenario creation – a forward-looking management discipline that runs multiple scenarios and analyzes the underlying drivers of success. High-performing financial institutions don't just look at superficial numbers and metrics. Rather, they consider the drivers of success and underlying assumptions and then actively measure against those assumptions. Unfortunately, many organizations employ the wrong metrics to determine if a strategy is working. Using data analytics can help financial institutions understand the market and how to measure success.

3. Effective Information Management 
Data analytics provides a wealth of insights, but organizations must determine what they really need to know. High-performing financial institutions effectively manage data and link business decisions to that information. They focus on forward-looking, prescriptive data versus information about what has happened already, constantly asking, "How can we do this better?" Just as importantly, they ensure key information is widely distributed within the organization.

4. Effective Control Structure
Are we achieving what we set out to achieve? Are we measuring and driving the right results? Establishing appropriate control structures helps ensure the desired results are achieved without destroying another aspect of performance. For example, a financial institution could meet its profitability goal, but do it in a way that doesn't best meet the needs of its customers, and in the process, damage trust, reputation and relationships.

5. Adaptable Risk Management Frameworks
Financial institutions are in the business of balancing risk – especially credit risk – and reward. The risk environment can change quickly due to macroeconomic factors, such as changing interest rates, unemployment and home values, as well as the organization's policies and appetite for risk. Effective risk management at a financial institution is closely tied to profitability. To support high-growth initiatives, risk management frameworks and accompanying strategies must be particularly adaptable to change.

Lessons from High Performers

Behind each of the five attributes that helps define and differentiate high performers are two factors: data analytics and the discipline to execute on key strategies.

If someone asked you to name your institution’s best customers, could you? Maybe you'd list those with the most money, but those may not be the accounts that are the greatest contributors to your profitability. It's very difficult to establish a good strategy – and execute on that strategy – if the institution doesn't understand what drives its profitability. High performers get it. They see the link between information, strategic thinking and the actions needed to achieve their goals.

Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of the Financial Managers Society.

About the Author

Danny Baker, Vice President – Market Strategy, Financial and Risk Management Solutions, Fiserv
Danny Baker is the Vice President of Market Strategy within the Financial and Risk Management Solutions division at Fiserv, Inc. He is responsible for the overall market strategy and business development for the company’s risk management, performance management and enterprise financial accounting solutions.