The Need for Analytics and the Value of Understanding Profit Risk
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James McHale discusses the significant impact of big data analytics on profitability and risk management for financial institutions. Key insights include the necessity of integrating data systems, understanding profitability dynamics, and employing strategies to mitigate profit risk. The document emphasizes the importance of using comprehensive analytics to improve market opportunities, customer retention, and overall institutional success.
The Need for Analytics and the Value of Understanding Profit Risk
- 1. James McHale, SVP/GM Analytics at Baker Hill THE NEED FOR ANALYTICS AND THE VALUE OF UNDERSTANDING PROFIT RISK
- 2. BIG DATA
- 3. According to Forbes, 87% of companies think Big Data will make big changes to their industries before the end of the decade. Even more think that not having a big data strategy will cause their companies to fall behind. “Only the most informed and profitable will survive and prosper”
- 4. Confidential & Privileged DocumentConfidential & Privileged Document The power of Big Data • Volume - Financial institutions collect large amounts of data from a variety of sources, including transaction, social media, and information from sensor or machine-to-machine sources. In the past, storage was a problem – but new technologies have greatly eased this burden. • Velocity - Data streams in at an unprecedented speed and needs to be sorted and stored in a timely manner. • Variety - Data comes in all types and formats – from structured numeric data in traditional databases to unstructured text documents, email, video, audio, and financial transactions.
- 5. Confidential & Privileged DocumentConfidential & Privileged Document Common uses of Big Data 1. Fraud Detection 2. Compliance and Regulatory Requirements 3. Consumer Segmentation 4. Personalized Marketing 5. Risk Management
- 6. Confidential & Privileged DocumentConfidential & Privileged Document Call to action 1. Get your integrated database system up and running 2. Start to understand profitability dynamics in detail 3. Evaluate your income statement with a focus on achieving long- term sustainability over short- term triumphs
- 7. Confidential & Privileged DocumentConfidential & Privileged Document What your institution will gain • Better identify market opportunities • Higher levels of acquisition, retention and protection of market share • Higher, irrefutable return on investment with respect to revenue capture
- 8. PROFITABILITY When you are able to marry the general ledger to the core and other ancillary systems of record we are able to create a comprehensive profitability model.
- 9. Confidential & Privileged DocumentConfidential & Privileged Document Building Profitability Analytics Service Branch Region Institution Individual Relationship (Household) Customer/ Member Product Group Product BH Analytics Systems of Record General Ledger Allocation rules Account Level
- 10. In this system, every product, account, relationship, household, agent, branch and region has its own unique income statement that ties to the overall institution profitability
- 11. Confidential & Privileged DocumentConfidential & Privileged Document Income and expanse allocations 1. Need transaction and statistical data to properly allocate income and expenses across deposit, loan and service product lines 2. Cost Center allocations – Lending Departments – Branch Operations – Electronic Services – Marketing, IT, Administration and other overhead
- 12. Confidential & Privileged DocumentConfidential & Privileged Document Funds Transfer Pricing 1. Simple Pooled Method 2. Singular Yield Curve 3. Multiple Yield Curves 4. Multiple Yield Curves with complex duration estimations
- 13. HOW TO IDENTIFY AND MITIGATE PROFIT RISK
- 14. Confidential & Privileged DocumentConfidential & Privileged Document Profit Risk Management Profit Risk: A risk management tool that focuses on understanding concentrations within the income statement and assessing the risk associated with those concentrations from a net income perspective. When profit risk is minimized, income volatility is mitigated allowing income to grow and capital to be stabilized.
- 15. Confidential & Privileged DocumentConfidential & Privileged Document Profit Risk Management Top 10% Most Profitable – 400% of net income – Majority of deposits – Largest portion of the loan portfolio – Cross-sell ratios – High level of loyalty – Age Lowest 50% – Unprofitable – Low deposit balance – Low loan balance – Cross-sell ratios – Rate chasers
- 16. Confidential & Privileged DocumentConfidential & Privileged Document Profitability of all relationships Percent Number of Relationships Total Profitability Concentration Average Relationship Profitability Cross Sell Services Ratio 10% 2,811 $10,571,269 478.11% $3,761 2.33 20% 2,811 $594,925 26.91% $212 1.74 30% 2,811 <$42,372> -1.92% <$15> 1.20 40% 2,811 <$273,572> -12.37% <$97> 1.29 50% 2,811 <$464,361> -21.00% <$165> 1.28 60% 2,811 <$578,142> -26.15% <$206> 1.09 70% 2,811 <$760,032> -34.37% <$270> 1.90 80% 2,811 <$1,032,057> -46.68% <$367> 2.20 90% 2,811 <$1,587,718> -71.81% <$565> 2.91 100% 2,811 <$4,216,901> -190.72% <$1,496> 3.44 Total 28,110 $2,211,039 100.00% $79 1.94
- 17. Confidential & Privileged DocumentConfidential & Privileged Document Top 10% of relationships Product/Service Number of Relationships Total Profitability Concentration 1% 281 $6,135,006 277.47% 2% 281 $1,296,752 58.65% 3% 281 $813,830 36.81% 4% 281 $581,217 26.29% 5% 281 $451,285 20.41% 6% 281 $368,878 16.68% 7% 281 $302,031 13.66% 8% 281 $252,220 11.41% 9% 281 $203,199 9.19% 10% 281 $166,852 7.55% Total Top 10% 2,811 $10,571,269 478.11% Total 28,110 $2,211,039 100.00%
- 18. Confidential & Privileged DocumentConfidential & Privileged Document Product & service profitability Percent Number of Accounts Total Profitability Concentration Business Checking 1,889 $2,939,840 132.96% Business Loans/Lines 1,076 $2,780,340 125.75% Mortgages 1,592 $1,468,889 66.43% Retail Money Market 2,054 $385,766 17.45% Business Money Market 1,178 <$2,861> -0.13% Cash Management 902 <$42,356> -1.92% Trust 787 <$50,993> -2.31% Retirement 2,462 <$64,169> -2.90% Credit Cards 3,278 <$105,223> -4.76% Investments 2,042 <$261,919> -11.85% Certificates of Deposit 5,796 <$296,668> -13.42% Consumer Loans 4,629 <$821,776> -37.17% Retail Checking 15,894 <$949,438> -42.94% Savings 11,590 <$1,051,458> -47.55% Electronic Services 13,524 <$1,716,935> -77.65% Total 68,693 $2,211,039 100.00%
- 19. Confidential & Privileged DocumentConfidential & Privileged Document Business vs Retail market profitability Market Number of Relationships Total Profitability Concentration Business 1,990 $6,023,790 272.44% Mixed 126 $1,161,611 52.54% Retail 25,994 <$4,974,362> -224.98% Total 28,110 $2,211,039 100.00%
- 20. Confidential & Privileged DocumentConfidential & Privileged Document Generational market profitability Generation Number of Relationships Total Profitability Concentration Gen Y 1,906 <$591,624> -26.76% Gen X 8,620 <$4,394,110> -198.74% Boomer 10,811 $661,725 29.93% Greatest 6,773 $6,535,048 295.56% Total 28,110 $2,211,039 100.00%
- 21. Confidential & Privileged DocumentConfidential & Privileged Document Branch profitability Branch Number of Relationships Total Profitability Concentration Main 1,049 $1,844,132 83.41% Downtown 2,113 $1,785,162 80.74% Broadway 1,247 $96,965 4.39% Old Town 2,251 $47,470 2.15% South 2,277 <$20,688> -0.94% Park 4,012 <$23,641> -1.07% Industrial 487 <$38,951> -1.76% River 1,191 <$110,403> -4.99% Westside 924 <$115,535> -5.23% Hill 3,173 <$174,401> -7.89% Eastside 1,423 <$192,979> -8.73% Garden 936 <$222,511> -10.06% Central 2,019 <$240,360> -10.87% Mall 5,008 <$423,221> -19.15% Total 28,110 $2,211,039 100.00%
- 22. Confidential & Privileged DocumentConfidential & Privileged Document Officer profitability Officer Number of Relationships Total Profitability Concentration Leanna 1,370 $1,902,080 86.03% Charles 1,456 $1,796,041 81.23% Spencer 1,098 $395,524 17.89% Javier 706 $165,375 7.48% Mac 895 $132,672 6.00% Stephanie 751 $91,509 4.14% Kevin 933 $16,629 0.75% Robbie 919 $10,821 0.49% Ernest 1,034 $8,395 0.38% Terry 1,331 $5,715 0.26% Les 1,306 $4,501 0.20% All Others (25 Officers) 16,311 <$2,318,223> -104.85% Total 28,110 $2,211,039 100.00%
- 23. Confidential & Privileged DocumentConfidential & Privileged Document The hard reality of a sales culture Comprehensive data analytics and profitability analysis reveals that • Most Customers/Members • Most Products • Most Branches • Most Frontline Staff … are unprofitable and consistently put the institution at risk.
- 24. Confidential & Privileged DocumentConfidential & Privileged Document Profit risk strategy 1. Set Profit Risk objectives and goals to spread profitability over a broader number of accounts, relationships, products, markets, branches and officers 2. Develop strategies and tactical plans to offset profit risk 3. Define institutional success based upon increased profitability, earnings and capital growth
- 25. Confidential & Privileged DocumentConfidential & Privileged Document Action plan 1. Understand who your break-even customers/members are 2. Go to market with a purposeful plan based upon what you now know 3. Onboard and welcome new customers/members with a concise message and call to action 4. Cross-sell products which improve stickiness, profitability, at the times your customers/members are in the market for them
- 26. Confidential & Privileged DocumentConfidential & Privileged Document What Do You Do Next? • See me afterwards to discuss any questions I was not able to address in this session • Talk amongst your peers about how they are addressing analytics in their institutions • Inquire with your Account Executive if you’d like to learn more or see a product demo of our analytics and marketing solutions • If you are looking for some literature or case studies visit BakerHill.com
- 27. Questions
Editor's Notes
- #12: Allocating all NSF income across all checking accounts evenly would be misleading and not informative to the level we are trying to achieve