EPM systems empower banks for the future

Banking leaders who are looking to implement or update an EPM system need to first verify that it will support the key aspects of their budgeting and planning processes. These typically include:

• Functionality to support budgeting, forecasting, management reporting and offering insights analysis to better understand drivers and impacts to earnings.
• Balance sheet-focused planning processes.
• Planning that encompasses different rate-related product types — loans, deposits, investments and borrowings.
• Projections for rates of the different rate-related products.
• Rate-related revenues and expenses, which are derived from the projected average balances and rates.

Interest rate risk presents the biggest challenge to these systems because the models need to account for different interest rate scenarios and how rates will change over time. The models need to be flexible enough to adjust for different rate scenarios.

Banks also need to make sure their EPM systems accurately forecast their expected credit losses across different product lines so they can calculate their reserves in a compliant manner. The expected credit losses will be different based on changes in rate scenarios and other factors as well, and the EPM forecasts need to take this into account.

Bank EPM systems should provide the ability to get insights and provide forecasts separately for different branches, products and channels as well as the bank’s overall organic growth and its strategic planning initiatives.

Initiatives should be forecasted and tracked in separate layers or buckets, which are incorporated into the base organic plan to get the total plan.

Key analytics for optimal bank operations

• Headcount/FTE
• Employee analytics such as branch transaction volumes and staffing by hour
• Cross-selling metrics
• New loans and deposits by channel
• Net interest margin (NIM)
• Efficiency ratio (non-interest expense/revenue)
• Loans/deposits (total loans over total deposits to measure liquidity)
• Return on assets
• Households

Profitability modeling and tracking will help banking leaders better understand issues that will be undiscoverable in simple spreadsheet allocation processes. Effective EPM modeling will help bank leaders understand:

• Which products, channels, services and customers are the most and least profitable — and why.
• Volumes and locations of transactions, cannibalization and household relationships.

“Deposits tend to make customer relationships stickier if additional products, such as loans, can be offered along with them,” Tripp said. “The ability to analyze product-type revenue by onboarded channel provides informed decision-making, such as digital banking and branch strategy.”

EPM systems also should provide banks with scenario modeling information that will be useful. 

EPM tools enable organizations to model various scenarios in response to market changes, interpret a range of potential outcomes and provide data-driven insights that help leaders proactively monitor changes and make critical decisions to protect the business. 

With the increase in M&A activity across all industries, including banking, EPM systems are more relevant in M&A modeling than ever. 

In the acquisition of another bank, analysts are able to interpret the potential impact the acquired bank will have on the collective bank, including evaluating the impact on corporate operations, interest rate risk and cost synergies. Once acquired, organizations can systematically integrate the entity with their EPM system to immediately interpret the impact of the acquisition, identify potential synergies and evaluate a range of potential outcomes by incorporating the acquisition.

Advanced forecasting capabilities based on increasingly powerful technologies are driving the potential for banks to make substantial improvements in their achievement of profitable growth, especially during market fluctuations.

In this environment, banks that continue to rely on spreadsheets for their forecasting will be at a disadvantage. And banks with EPM systems that aren’t specifically designed for their industry may not be able to measure some of the key metrics that they need to evaluate their progress and potential.

Whether banks incorporate these systems themselves or turn to third parties for assistance, the value of data-based decision-making in the current market environment tends to far outweigh the costs of implementation.