Navigating your Bank in Turbulent Times: Do You Have the Tools you Need for the 21st Century?

 Author: Brad Dahlman, bdahlman@profitstars.com

In ancient times, sailing ships used the sun and stars as guides to find their way. A change came in the 1300s, when the compass became the most advanced navigation device. This was a major improvement and allowed ship captains the ability to navigate even in cloudy conditions when the sun and stars were not in view.

In the 1990s, GPS systems became a common navigation tool found on ships. They provide pinpoint accuracy. The increasing sophistication of navigation tools makes the captain’s job considerably easier.

By now you may be wondering what navigating a ship and managing a bank have in common.  Well, both the ship captain and “captain of the bank” must understand the following questions:

• What is our current location?
• Where are we headed?
• What is our current velocity?
• What is the best path (and are obstacles in our way)?
• When will we reach our destination?

For bank management, the goal is to understand the current balance sheet/ income statement and to chart a course toward financial health.

The Past Five Years – Rough Seas

Over the past five years the bank industry has had some significant challenges, but there is a strong financial recovery occurring today. Below are graphs illustrating the recovery.

Net Income - Banking Industry (Source: FDIC)

Margin and Fee Income - Banking Industry (Source: FDIC)

Charge-offs - Banking Industry (Source: FDIC)

Clear Sailing Ahead – Outlook Good

Today we have stronger balance sheets, lots of liquidity, a returned to historic profitability levels, wider margins, and reduced charge-off/provisions expense. I believe the worst is behind us and for those banks that have survived the last storm (1,177 fewer banks now than in 2007) it is time to survey the damage from the past storm and chart a path forward using 21^st century navigation tools.

The key financial management tools that banks need in the 21^st century are those that help them better understand the details of their organization. It is no longer enough to know you are headed north!  We need tools like turn-by-turn GPS navigation – detailed data about our branches, products, delivery channels, and customers.

From a profitability prospective, there are three dimensions that progressive banks examine:

• Branch
• Product
• Customer

New tools enable us to understand profitability, set profitability goals/objectives, develop and execute tactics for improvement, and monitor results.

Key User

Profitability Systems that help organizations better understand profitability of branches, products and customers are important tools and used by several different groups.

Bank management - Management uses them to understand profit, see trends, and evaluate branch/product decisions. It is actively involved both in setting direction for how profitability data will be used and also involved with the configuration of business rules associated with each application. Senior management’s support of these applications is essential for success.

Bank sales/service staff - We commonly find that banks are installing customer profitability systems and feeding “profit ranks” to their front-line staff.  Armed with this information, front-line staff is better equipped to determine if fee waivers or rate concessions are justified.

Having strong profitability systems in place can help banks better manage any turbulent waters that may lie ahead.  Do you have the 21st century navigation tools that you need or are you still using a compass?