Asset Based Lending
Chief Investment Officer
Commercial Loan Automation
BirdsEye Viewbranch pofitability
Branch P&Ls are financial and performance tools that can be used to improve the quality of decision making with respect to the consumer bank and, with it, overall bank profitability. It can be used to consistently evaluate individual branch success as well as create internal peer comparisons.
The ultimate goal of branch profitability, though, is to allow branch managers and teams to run their branches as if they were their own business. “Run it like you own it” is a solid principle for effective management.
In addition, branch profitability can be used to link into incentives and therefore become a communication tool for executive management to tell the branches what their expectations are and the strategic role they’d like to see the branches play. For example, informing, rewarding and recognizing branches for household retention and new household acquisition are goals that can be reported on frequently using the branch profitability tool. Similarly, attaching a revenue calculator to the tool allows branches to set their own production goals to hit revenue projections with quality accounts.
Also, the level of banking knowledge, and the understanding of how banks make money, are typically much enhanced with the introduction of branch P&Ls. Employees can readily understand how their actions and successes directly impact the success of their business. They better understand the impact of rate exceptions, fee waivers and staffing levels, which typically are too removed from the field to be clearly understood.
A good P&L system should consider the branch as a stand-alone bank. It should utilize actual data at the branch level and include minimal adjustment.
Adjustments may include items such as:
· Adding back revenues that are missing from the true branch-level financials due to reporting limitations
Branch profitability reporting requires a lot of judgment calls. It is important to bring all the parties to the table – finance, HR, branch banking, technology and enterprise-wide leadership. It is also preferable to minimize subjective judgment and maximize utilization of objective data.
Branch-level reports should be understood at the branch level, so complexity isn’t necessarily a plus. All too often, less is more, and this is likely to be a case in point.
Branch P&Ls are the true financials for branch banking. They should represent balances, spread, fee income and expenses associated with the branch, and, ideally, with each individual customer and account within the branch’s portfolio.
A difficult question is what lines of business and revenue streams should be included in the report. System limitations often govern this decision, but, barring those, one should include everything possible except for businesses that create significant volatility and could exert overwhelming influence over the balance sheet of the branch. For example, commercial banking can be replaced with loan revenue proxy.
What should be included in the ideal branch P&L report?
· MTD and YTD information
· Dollar and percent variances by line items to highlight successes and opportunities
· Drillable functions such as total fee income, direct expenses, indirect expenses, product-related expenses for the entire branch system, as well as at the branch level – every line item
· Trended monthly results at the branch level (rolling 13 months is nice)
Simplify your P&L to make it more relevant to the readers. For example, use the following lines:
- Net interest income contribution
Break fees - loans
Net loan spread
Break fees - deposits
Net deposit spread
Net interest contribution
- Non-interest income
- Total fee income
- Major lines of business contributing to fee income (e.g. merchant services, credit card, investment referrals etc.)
- Total revenue before other costs (e.g. credit costs, capital charge)
- Total revenue
- Non-interest expense:
Direct expense (drill down function)
Indirect expense (drill down) – allocations
- Total operating expense
Note that the P&L still includes some judgment calls (e.g. funds charge and funds credit) which can “make or break” a P&L. That’s where transfer pricing enters the picture.
Also, some decision rules need to be made regarding the servicing expense of commercial loans and clients at the branch and other activities conducted on behalf of other lines of business. Similarly, decisions regarding what should be included in direct expenses are needed. What about marketing and sales expenses? Customer acquisition and servicing expense? Premium items used by the branch? How specific do you want to be? Will you include ATM expenses, credit card expenses etc.? Or product related expenses such as appraisals, loan underwriting, credit reports? These are all decisions that need to be made before the P&L system is initiated.
Generally, the larger the role P&Ls have in your decisions, the more detailed the statements should be and the smaller the items that should be included. Also, if you rely on the P&Ls as a major input to incentive compensation, they must be reliable.
At the end of the day, branch P&Ls should only be developed when you’re certain what you will be using them for. Lay out your goals clearly, as well as the primary usage of the reports, before you make the decisions regarding information inclusion and level of details. Those should dictate what your P&Ls look like.
My personal view? I like “run it like you own it” very much. I am wary of transfer pricing systems that create disincentives for the consumer banking business – and those abound today. Instead, I am a firm believer in accountability, so as long as the numbers don’t lie or create false impressions, I am in support of branch-level P&Ls. However, if these have no consequences – no incentives tied to them, no actions taken as a result of the information – I’m not sure they have a real purpose. So make sure your P&Ls are accurate, and then put them to work.