Pub. 9 2019-2020 Issue 3

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S September • October 2019 11 it’s impossible to fully understand which relationships drive the most profitability for your institution. Knowing the value of all relationships offersmany important benefits that impact profitability, including the ability to: Retain and expand relationships with your “best customers,” pricing loans and deposits appropriately and providing a commensurate service level • Identify sub-par customers, who represent improvement opportunities • Market products and services appropriately, including cross and up-sell opportunities • Once you’ve accurately defined relationships, begin analyzing their profitability. Measuring Profitability for Institution Leaders and Relationship Managers Once your institution can effectively build and manage relationships, it’s critical to use a robust calculation and modeling engine that measures both historical and forward profitability. Here, the consistency is vital. You need to be consistent between historical and projected profitability, and have a consistent approach to how you analyze profitability across the organization, products, branches, and relationships. Be sure to make the data transparent, agree on methodologies for calculation and how to access the source data, and define each calculation needed (examples include Funds Transfer Pricing (FTP), Risk Adjusted Return on Capital (RAROC), provision expense, and cost allocations). Institution leadership can get a more accurate gauge of current performance and better predict future performance based on factors such as relationship profitability of the portfolio as existing loans and deposits mature, and the effect of new business on future profitability. They can also look at performance by individual relationship manager to guide incentive compensation, inform coaching opportunities, and identify best practices used by top performers. Individual relationship managers can prioritize their business development and account management efforts by understanding how relationships perform, and focusing extra time on the top and bottom deciles. Unfortunately, 68% of survey respondents say their insti - tutions lack an automated means to analyze the profitability of complex relationships. Respondents cite lack of data (45%) and lack of analytics tools (55%) as top impediments to relationship profitability analysis. Don’t Price in a Vacuum Building on your understanding of your client’s sphere of influence and empirical profitability, each deal you make must add value rather than dilute it. The ability to understand how proposed new business im- pacts profitability hurdle rates (such as Risk Adjusted Return on Capital) and to compare pricing scenarios before making a deal empowers relationship managers to achieve a win-win for the organization and for the customer. For the institution, you create value through: • Enhanced earnings • Retained or improved relationships (especially those in the top 1%) • Profitable growth • An effective and efficient process for loan officer and other relationship managers For the client, you create value by: • Establishing an efficient process to make better, faster de - cisions • Providing multiple options to best structure deals to meet their unique needs • Promoting a strong relationship with the institution, focused on long-term value Create a Culture of Profitability To create a culture of profitability across the organization, financial institutions must not overlook any opportunities. By bringing relationship profitability information from the back office to the front lines, your team can leverage data to drive day-to-day decisions that improve value and customer service. Resources Learn how technology can help: Axiom Relationship Profit - ability and Pricing System n Institution leadership can get a more accurate gauge of current performance and better predict future performance based on factors such as relationship profitability of the portfolio as existing loans and deposits mature, and the effect of new business on future profitability.