BANKS PERFORMANCE

BANKS PERFORMANCE

To improve  banking operations It's important to adapt their processes to respond to internal and external users in shorter times.

Generally, there is a tendency to compare financial results between different regions. The impact on net interest income becomes the results comparative metrics which, do not necessarily represent the real money market impact on balance because is in a different context in terms of regulations , customers and culture.

The Latin America region, banks have adapted to use specific applications, not always performed by appropriate advisory team, so It makes dificult to have applications to bring a full range of banking services available in a region, if these applications are not in context and do not provide appropriate solutions, which are not oriented to real customers needs. These solutions usually are sold and forced to be adapted rather than being adopted , thus generating more work, major changes, more cost and more effort , issues which ultimately may also be more frustrating due to longer time invested in its implementation.

Investments oriented to operational improvements based on reducing decision making time, must be supported by best in class teams in the industry, where low tolerance to failure must be implemented because it affect banks financial results in different ways (customers, delinquency , operating errors ... finally returns and profitability).

How can be defined the profitability of a bank in practical way so it is involve simple process improvements and technological support?  

Must be defined the priorities of a commercial bank, where main clients in Latin American, has specific consumer expectations, culture, and needs which are substantiated on the current environment.

Regulatory impact on financial margin requires greater analysis, and a management team oriented towards financial efficiency.

Lets see an example:

Analyze whether the performance indicators are representative in circumstances where the environmmet  is volatile. Some indicators such as Bad Debt can be transformed into Bad Debt under assesment, where the assets are adjusted to market risk + risk inherent to the own portfolio. An example: From a risk perspective, an in-customer is low risk, same out-customer is high risk, it is an overall good customer?

How can this point be achieved without technological support? How can we achieve reorienting technology to support to functional experts at work, so they can take proactive tinking and make assertive business decisions? One of the most important aspects for considering these changes is time of response, which is crucial to obtain valuable information that let analysts answer the following questions.

What it is the CFO, asking for, when arrives to your office?

• It is the liquidity level within the tolerance margin?

• Is the transactional cost being optimized?

• How are the costs vs. income, expenses, revenues, gross margin, etc.?

• Pool rate is appropriate to the opportunity cost?

What’s the CMO ask?

• How is the customer level satisfaction for each channel?

• Has improved customer profitability?

• Has changed customers loyalty, retention rate?, queries?

What's the CIO ask?

• Does the platform operating 24x24?

· Which are the top reasons affecting delinquency level?, economical environment reasons?

• Are risk assessments and compliance polices applied?

• ...

To answer some of these questions, have been developed some solutions that let redirecting functions from the technological support to the functional expert, letting IT Team focus to maintaining the operation of the systems available 24x24.

It is vital for the banking operation to adjust the response in shorter time; we should not talk about researches cross regions; in our region, we have to see how banks adapt the use of targeted applications with an appropriate equipment and with appropriate consulting. It doesn’t makes any sense to have all banking solutions available if does not have the right consulting and functional team working together for finally satisfied customer’s needs. The Investments based on operational improvements for the reduction of time in the decision making must be supported by the best ones in the industry, no opportunity is given to failure, because as we saw earlier, this issues directly affects bank financial results by different angles (customers, delinquency, operational errors, and finally profitability)

What prospects solutions do we have available on Market?

A set of solutions that allows answering all the questions outlined above and many more ... EPM Enterprise Performance Management and Business Intelligence, both designed to create a view integrated and consistent of the different angles listed above. https://help.sap.com/boepm/

1. So, how is defined profitability in banks?

As ROA, ROE, Margin, Spread (%) and any ratio that connect cash flow or net income to the resources invested

2. What about profitability by branch?

First, in order to be profitable, there must be continuity in the operation and innovation process in the branch; in this case, we measure quantitative effects (customer assets, deposits, gross interest income, fees, expenses, costs, etc.) and qualitative effects (customer service) that impact the overall result of the bank. They are (branches) almost self-sufficient entities that distribute products and services.

If we look at the portfolio of EPM (Enterprise Performance Management), we would find a solution that will allow us to model this vision of profitability; a tool for example as SAP PCM (Profitability and Cost Management).

Other solution is SAP Business Objects, which allow you to create logical cubes with ETL process that will leave us assign costs, expenses and income to a particular type of branch.

Let’s take a view:

A.      SAP PCM

PCM provides a more intuitive and focused interface to be used by the finance team, so it is a more flexible tool that can be used independently of the IT team to create profit/cost models.

It can be integrated with DB SAP and Non-SAP.

BENEFITS

There is a higher quality in the reports of profitability and costs in different dimensions, due to  SAP PCM eliminates the distributions of income, costs, expenses and investments layers and iterations which is done through a large volume of data and dimensions. Example:

• Customer profitability.

· Customer Net revenue

• Customer Service satisfaction.

• Profitability per branch.

• Cost per serving.

• Logistics costs.

• Costs per transaction: back, middle and front office.

• Customer value, over the time.

• Economic Profit (Economic Value Added) by cost object.

Several alternatives to issue information, either on own web reports, emission data to other databases and data warehouse or business intelligence tools whether or not SAP.

In relation to the model and financial process

• Management of the financial model independently of the IT area.

• Flexibility to handle various versions of the financial model (Actual, Budget,

Prognosis, Economic Value Added).

• Provides the simulation scenarios based on indicators planning and continuous forecasts.

• Reports of errors and warnings of calculation, which allows to the owner of the model to have better control of calculations, and maintain safety and reliability of the information that is provided to users.

• Execution of calculations with a large volume of data in a short time (this point it is certainly a great differentiator).

B.      SAP BUSINESS OBJECTS

Other solution is Business Objects, which allow you to create logical cubes with ETL process that will leave us assign costs, expenses and income to a particular type of branch.

It’s possible to create indicators as KPI, KRI, and other performers to track the branch profitability. We must incorporate some predictivity potential with Predictivity Analytics to make a best practice and become a successfully branch management.

Do you think this it is possible?

This article is dedicated to the profitability and cost management, in future articles will be analyzed the different EPM solutions that deal with Planning and Strategy, including more details.

Daniel Juvinao