Financial Institutions Need to Do More to Understand Profitability, According to New Kaufman Hall Report

Results of national survey show financial institution leaders lack visibility into key profitability drivers needed to navigate banking’s changing environment

CHICAGO – June 24, 2019 – More than 90 percent of financial institution leaders believe their organizations should do more to leverage profitability analysis to inform strategic decisions. Yet 80 percent have limited confidence in their institutions’ ability to forecast and manage profitability performance with their current financial planning processes and tools, according to a recent survey of executives from U.S. banks, credit unions, and other financial services organizations. The 2019 Profitability Perspectives research was conducted jointly by Kaufman Hall—a leading provider of enterprise performance management software, data, and management consulting services—and the Financial Managers Society (FMS). 

“Faced with continued tight margins, and an uncertain economic climate, financial institutions require data-driven insights, robust analysis capabilities and the ability to implement best-practice profitability strategies,” said Kermit Randa, CEO of Kaufman Hall Software. “Our team is committed to helping our financial institution clients navigate these evolving market factors, and that commitment was the catalyst for our 2019 Profitability Perspectives report. Through this research we continue to deliver technology and data solutions that provide our Axiom software clients with the tools they need to act decisively with reduced risk.” 

A new report released today, 2019 Profitability Perspectives: 10 Findings Reveal the Need for Specific Leadership Action, includes key survey results and action steps executives can take to help improve profitability at their institutions. 

“The C-suite, Board members, and other senior professionals at financial institutions understand the value of a profitability measurement and analysis tool, but industry adoption has lagged,” said Ken Levey, vice president, Financial Institutions at Kaufman Hall Software. “For example, we know that greater insights into the scope and profitability of an institution’s most valuable relationships facilitate better pricing decisions, but a lack of data and tools to perform these analytics are seen as major roadblocks. There are solutions to help institutions address these challenges, but the industry has been slow to implement them.” 

According to the survey, nearly two-thirds of respondents (63 percent) have gaps in their understanding of profitability, and less than 10 percent have a clear understanding of profitability drivers. More than 90 percent say it is important to monitor key profitability drivers, such as customers and relationships. Yet, such parameters are not currently monitored in more than 60 percent of institutions surveyed. 

More than 68 percent of respondents said their organizations lack an automated means to analyze the profitability of complex relationships. Sixty-nine percent noted that they are not able to view the profitability components of all the accounts influenced by one customer—i.e., the relationship value of that customer.

In addition to these and other key survey findings, the 2019 Profitability Perspectives report provides strategies to help financial institutions improve profitability. Among the recommendations are: 

•    Provide education to team members on profitability drivers and analysis.
•    Make it possible for finance professionals to spend more time developing and using profitability analytics that inform strategic decision-making and execution.
•    Ensure monitoring of each of the important dimensions of profitability.
•    Provide visibility for relationship managers of all accounts influenced by one customer.
•    Adopt funds transfer pricing, using an instrument level-based approach.
•    Establish and support a profitability steering committee.

“By adopting these measures, financial executives will have more effective methods to manage profit margins, which will enhance their ability to improve financial performance into the future,” Levey said.

“This report provides us with valuable insights and a realistic picture of the struggles and opportunities experienced by other institutions in the area of profitability analysis,” said Mark Hutchinson, vice president of financial planning & analysis, STAR Financial Bank. “Being able to analyze profitability across multiple segments to inform decisions at our bank is a fulfilling accomplishment. The research in the survey reinforces that the investment years ago in our profitability reporting system was the right move.”  

The third annual 2019 Profitability Perspectives report is intended for leadership teams of financial institutions, and focuses on their priorities and practices in profitability analysis. Survey respondents included senior finance professionals in banks, credit unions, and other financial services organizations nationwide.