What are Bank Branch Performance Metrics? April 22nd, 2013. Standard framework for detailed statistics by country National data are grouped and, where necessary, re-classified to fit as far as possible into the following standard framework of presentation. And we encourage you to believe the models, in the same way you believe the credit risk models. 38% of traditional branches are under $40 million in size and are some distance away from desired profitability. If the facility and site are adequate, a stronger emphasis on sales and marketing may turn the corner. As branches adopt more of a retail store approach, this profitability metric is certainly one to consider. Based on those assumptions, a branch needs about $25 million in deposits to achieve breakeven. The business loan, however, has a 1.69% pre-tax profit as a percent of loan balances, and a 20.83% ROE, assuming an 8.5% capital allocation. Not all loan income is attributable to branches, so it is reasonable to say that branch revenue is slightly lower — about 2.0% to 2.5% of deposits. Based on this, 48% of branches today are below desirable ROI, and of those low or unprofitable branches, almost 60% operate at a loss. This will cause the spreads of deposit products and therefore within branches to increase, should banks be able to maintain the deposit mix they worked so hard to improve. Please use a corporate/work email address instead. The simplest method of branch accounting is for the head office to operate a singlebranch account for each branch. Regulation and customer behavior were the likely reason for the decline. Profitability Analysis is a very essential branch of financial analysis and a must study of Financial Modeling. You can’t control that. Let rate shoppers leave for greener pastures and normalize the mix of deposits. Branches are often counted on to generate double their cost in revenue. So, nominal branch expenses actually increased. In 2017, total loan income — less loss provision and interest expense, plus deposit-based fees — was equal to 2.85% of the deposit base. What Now? Today, average deposits per branch total around $63 million, a 40% increase. Starting mid-2007, Fed Funds declined precipitously from its’ 2006 peak. About 10 years ago my firm analyzed the hundreds of branches in our profitability database to determine exactly what is "critical mass". According to Peak Performance data, just slightly more than half (52%) of all branches in the banking industry are achieving acceptable levels of profitability. The method is most often used when there are a small number of branch accounting entries in the books of the head office. Fast forward to 2006-2015, when deposit growth outpaced loan growth, 61% versus 19%. We would like to perform a branch profitability analysis on all of our branches. Develop a fact-based, objective view of the issue. For example, there’s “very limited value in a standard P&L statement,” Ridgway notes. Interest income When the Fed last raised rates in mid-2004 through mid-2006, branch direct pre-tax profits as a percent of deposits peaked at 1.20%. Is the branch on track to achieve break even, or desired profitability, in a reasonable period of time? By investigating each branch of the profit equation, revenue and cost, and drilling down to explore a business’s current and historical performance figures (e.g. Metrics can measure everything from how long it takes tellers to complete transactions to how long customers wait in the lobby. Is it a site or location (convenience) issue? Targeting $50 million in deposits helps assure that the branch will more than cover fully loaded expenses and help the bank achieve a good efficiency ratio. Since some banks have performed financial belly-flops, you may want to investigate a bank's profitability before you place your money in their care. To connect with Guenther, please send him an email. Deposit spreads have been the bane of banks in recent years but that could change if interest rates continue to rise. Don’t Fear The FinTech. If this is the issue, address options to relocate or improve. Poor access, parking or signage can torpedo even a great location. Its major expense is the interest paid on its liabilities. And grow they did. They tell you the risks, and sometimes the uncomfortable truths, that need to be confronted. We know intuitively that loans are riskier than deposits, mostly relating to credit risk. We sorted by pre-tax profit contribution as a percent of branch deposits, and further sorted by “direct” profits and “fully-absorbed” profits. Is it a market growth issue? Douglas T. Hicks, CPA, CMC . As mentioned, the relative and nominal branch direct operating expenses increased from 2006 to present. Customers Bank onboarded 100+ new commercial accounts, completed more than 1,200 business loans and more. Should you invest in more ATMs or branches because you are simply too inconvenient compared to competitors. Learn why & how leading FinServ firms are advancing from traditional personalization to customer journey orchestration to improve CX and business outcomes. According to FDIC data, in the ten years prior to 2006, loan growth outpaced deposit growth, 108% versus 92% respectively. What has been their reaction to this challenge? A profit center is a branch or division of a company that directly adds to the corporation's bottom line profitability. A bank branch performance metric is a quantifiable measurement that assesses and tracks a specific process that occurs in a brick-and-mortar location. Perhaps the best way to determine whether you run a profitable business is by running margin ratios, also referred to commonly as profitability ratios. With all of these actions, what is left for bankers to do to improve their branch and deposit profits? The major portion of a bank's profit comes from the fees that it charges for its services and the interest that it earns on its assets. It is doubtful, based on economic conditions and Chairman Janet Yellen’s own statements, that they will raise rates as quickly as they did 2004-2006. By leveraging technology to shrink back-office spaces in branches, financial institutions can either reduce the overall branch footprint (and cost) and/or … So the natural reaction was to stop chasing hot money. Organizational PROFITability accurately ties compensation to performance with branch profitability measurement, loan balances are assumed to be match-funded with debt priced off a funding cost curve representing the bank’s (or, more accurately, the industry’s) current cost at each maturity/paydown point for the loan’s principal. This field is for validation purposes and should be left unchanged. How do marketers quantify business outcomes across every digital and offline touchpoint? Sophisticated software allows managers to analyze results and look at multiple segments, regardless of what factors are going into the profitability analysis. For traditional locations, a branch typically costs between $600,000 and $800,000 a year to run, including overhead and back office support costs. While this is still a critical gauge of branch performance, it should be a starting point only. By Guenther Hartfeil with Peak Performance Consulting Group. Generally, a good approach is to evaluate top performing branches and apply best practices to lower performing branches. Branch accounting provides better accountability and control since profitability and efficiency can be closely tracked for each location. Come learn why 2021 is shaping up to be community financial institutions’ time to rebound, and why your CEO should lead the charge. About 10 years ago my firm analyzed the hundreds of branches in our profitability database to determine exactly what is “critical mass”. Many un- With the Consumer Financial Protection Bureau continuously harping on overdraft fees, boosting checking fees does not appear to be the answer, although there may be hope in giving customers menu choices when building their own checking features and benefits, once the technology becomes more readily available. The picture is even better. According to our profitability peer database, fully absorbed branch pre-tax profits as a percent of branch deposits declined 123% between the end of 2006 to today’s abysmal -0.22%. Assess the market and determine the unique role for each branch in the network. It is precise because it rolls up exact account profitability and includes related company data. This is counterintuitive to what we have been reading. Gross Profit = Net Sales – Cost of Goods Sold 2. And, as mentioned above, average deposits per branch grew during that period! During this time of historically low rates, the fate of branch profitability lay in the lurch, driven by the spread decline in deposit products. How does a branch that costs $500,000 ($43 million times 1.16%) in annual direct expenses increase to $743,000 ($63 million times 1.18%)? To determine the profitability of banks, simply looking at the earnings per share isn't quite enough. Profitability Branch shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project. The decline in branch transactions has been well-publicized so it’s normal for bankers to reduce staff to reduce the relative expenses within the branch and therefore increase branch profitability. Half of the branches that are unprofitable today will never cross the breakeven threshold; they will forever be a drain on resources. Taking salary and benefits off of the table in branch expense reductions reduces the positive profit impact of such an initiative. Referenced in the first blog, the concept of profitability per square foot is a common performance metric for the retail industry. Bankers felt pretty good about their relative amount of core deposits during this period of historically low rates. Measuring Customer and Product Profitability at Community and Regional Banks . The growth of fintech has revolutionized financial services, changing traditional practices and customer expectations, but one innovation opportunity remains left behind—the financial calculator. According to Peak Performance data, just slightly more than half (52%) of all branches in the banking industry are achieving acceptable levels of profitability. A great deal of these costs support those customers dealing with transactions and activities related to a checking account. Over one quarter (28%) are below breakeven, and most of the remainder are at least contributing to overhead even if they are not achieving acceptable ROI. This seemingly anomalous data about increasing branch expenses tells me that branch consolidations are concentrated in the largest banks and community banks have not yet caught the bug. Edmond J. Olejniczak III, CPA . For most lending institutions, the current cost of an advance from their regional Federal Profitability analysis is a branch of financial analysis that consists in putting measures of profit into perspective. More often, small branches are in a poor location. Half said yes, the other half said not yet. Customer profitability (CP) is the profit the firm makes from serving a customer or customer group over a specified period of time, specifically the difference between the revenues earned from and the costs associated with the customer relationship in a specified period. CONSTRUCTING A MODEL OF BRANCH PROFITABILITY There have been many studies related to bank profitability, especially regarding economies of scale in banking. Flush with the success of automatic overdraft privilege, branch fee income as a percent of deposits stood at 0.58% during the second quarter of 2007. Branch/ATM Profitability Branch Strategy Maximizing the efficiency of the branch network requires an understanding of demographic, competitive and economic trends as well as detailed financial modeling. It is the beginning of that period prior to 2006 when loan growth outpaced deposit growth. Here’s why bankers should pay more attention to their deposit balances going forward: In the summer of 2006, the Federal Reserve ended a two-year binge raising the Fed Funds Rate, which had soared from 1% to 5.25% during the period. The use of the branch account is … What has declined as branches grew in size was the relative size of branch support function expenses, 1.42% as a percent of deposits in the second quarter 2006 versus 1.07% today. We sorted by pre-tax profit contribution as a percent of branch deposits, and further sorted … What Machine Learning Taught Us about Our Branches . First, assess the problem. Growing spreads mean growing profits. But the capital required to support a business loan is far greater than the capital required to support a business checking account if the bank allocates capital to products based on risk. If deposit and therefore branch spreads return to where they were in 2006, and fee income and operating expenses remain the same as today, branch pre-tax profits as a percent of deposits could soar to 1.11%. Profits would increase to 3.15% of balances, and ROE would be a stunning 105% based on a 3% equity allocation. All content © 2021 by The Financial Brand and may not be reproduced by any means without permission. I cautioned them that, although I believe there are opportunities to reduce branch staff, I don’t think salary and benefits expense would decline. There it would stay until the early signs of the Great Recession reared its ugly head. We will use allocation method B to break out costs and actually make a “profitability” calculation, a powerful tool for determining the productivity of each firm member. Growing average branch deposit size has not bridged the gap. LinkedIn About 10 years ago my firm analyzed the hundreds of branches in our profitability database to determine exactly what is "critical mass". In the face of declining branch transactions and changing branch channel usage, there are more headwinds than tailwinds. Deposits spreads were crushed. The next logical question is how long do bankers think it takes to win new core deposit relationships versus a loan? If you don’t have the right analytics, then you can’t know where the problems are, and which levers to push to create opportunity. Also, since that time, support function allocations declined, more than offsetting fee income decline. Today, it’s only 0.42%, driven by large scale declines in retail checking fees, which stood at 4.95% of product balances in the second quarter 2007 and is now at 2.05%. Here is insight into achieving accurate performance accountability for your marketing efforts. These days, if you want to make tough branch decisions, use a good college student instead of an experienced banker. There is, however, an even bigger challenge facing the industry: the sheer number of branches that are too small to be profitable. (1) The idea of profitability by branch is a difficult conceptual problem. Net Profit = (Operating Profit + Any Ot… Traditionally, branch performance measurement equated to branch profitability analysis. 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