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Profitability Analysis – A New Regulatory Expectation…

Strategically Speaking
Aug 17, 2011

Brad Dahlman Author:Brad Dahlman,

Banks and Credit Unions have always had financial reporting.  Since the beginning of time they have kept “the books” with a fairly detailed general ledger that tracked the institutions balance sheet and income statement.  Over the past twenty years, organizations have begun digging a bit deeper into profitability (below the “total institution” level) – into branch, product and customer/member profitability.

These profitability solutions help financial institutions better understand some key questions like…

  • Which are my most profitable branches, product and customers/members?
  • How do I protect my most profitable clients?
  • How can I improve profit for an underperforming branch/product?
  • What might be the impact of regulatory changes be on the profitability of my products? (Frank-Dodd and Durbin in just the past year have had a huge impact on product profitability)
  • Should we measure employees based on asset growth or profitability improvement?

Having answers to these questions and managing your institution with profitability in mind has never been more important.

Regulatory Interest in Profitability Analysis

Something new and interesting happened this month…Regulators have started to ask for profitability analysis.  In just the past week alone, three clients have approached us for help in understanding profitability based on a regulator examination comment. One financial institutions regulatory comment said:

“Revise the 2011 Business Plan to include, but not limited to the:

  • Ensure sufficient earnings are obtained to reach your strategic net worth goal for 2011.
  • Implement Branch Accounting by NLT (no later than) 2012.
  • Cost/Benefit analysis for each product and service by NLT (no later than) 12/31/11.
  • …”

Stop and think about that for a second.  Regulators are now EXPECTING that you would know which branch and products are contributing to your bottom line and which are not.  They are also expecting this information be shared and incorporated into your strategic plan.  This means that they will be expecting you to not only understand this information but use it to manage your business.  Once these systems are in place the next likely questions are …

  • What is your strategy to improve the profit of your unprofitable branches? 
    • Will you be closing branches?
    • Dedicating additional resources to make them profitable (i.e. grow the business)?
    • Reducing expenses at branches to reach profitability levels?
  • Why are some products losing money?
  • What is the likely impact of regulatory changes on the profitability of your checking products?

Are you Ready?

It was only a matter of time before regulators started asking for more detailed profitability analytics.  This increased regulatory scrutiny of earnings and profitability is only going to increase.  Are you ready for the regulators?  Maybe you’ve been asked for profitability analysis already – share your comments below.

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