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Strategy Development: Maximizing Profitability and Growth

Learn why strategy development is crucial for maximizing profitability and achieving growth in the banking industry. Explore strategic planning, situation analysis, and financial projections to bridge the strategy gap and achieve strategic objectives.

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Strategy Development: Maximizing Profitability and Growth

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  1. March 11, 2015

  2. Profitability and Strategy

  3. Strategy: Why Do We Need It? Vision

  4. Strategy: Why Do You Need It? Extinction

  5. Strategy: Why Do You Need It?

  6. Strategy Development Strategic Planning Pyramid Situation Analysis Situation Analysis

  7. Strategy Development Situation Analysis

  8. Strategy Development Situation Analysis

  9. Strategy Development Situation Analysis

  10. Strategy Development Vision

  11. Strategy Development Vision

  12. Strategy Development Universal Vision Crafter – Banking Edition

  13. Strategy Development Strategic Objectives

  14. Strength: Experienced commercial lenders Strategic Obj.: Triple small business clients in three years. Weakness: Small business products/services Opportunity: Small business market growth Strategy Development Strategic Objectives

  15. Strategy Development Operating Plan

  16. Strategy Development Operating Plan

  17. Strategy Development Operating Plan

  18. Strategy Development Financial Projections

  19. Strategy Development Financial Projections – Strategy Gap The strategy value gap analysis asks: what is the value gap, on a per share and percentage basis, of your current strategy relative to the value that could be created through a strategic alternative? There are two general approaches to measure this gap:

  20. Strategy Development Six Project Phases

  21. Strategy Development Six Project Phases - Assessment

  22. Strategy Development Six Project Phases - Analytics

  23. Strategy Development Six Project Phases: Analytics – Sample Demographic Data

  24. Strategy Development Six Project Phases: Analytics – Sample Deposit Market Share

  25. Strategy Development Six Project Phases

  26. Strategy Development Six Project Phases – Exercise/Homework Break Into Small Groups Each Group Member Present Their Bank’s Financial Strengths/Weaknesses Group Selects One Member to Present to Class

  27. Strategy Development Six Project Phases – Strategy Team Retreat

  28. Strategy Development Six Project Phases – Detail Plan Development

  29. Strategy Development Six Project Phases - Completion

  30. Strategy Development Six Project Phases - Execution

  31. Exhibit 1: Overall Financial Performance Current Quarter CQ -1 CQ -2 CQ -3 CQ -4 (Percentage of Average Assets:) Interest Income--FTE 6.90 % 6.79 % 6.54 % 6.33 % 6.26 % Interest Expense 2.63 % 2.45 % 2.27 % 2.13 % 1.97 % Net Interest Spread--FTE 4.27 % 4.34 % 4.27 % 4.20 % 4.29 % Provision for Credit Loss 0.17 % 0.16 % 0.19 % 0.21 % 0.16 % Noninterest Income 2.49 % 2.53 % 2.50 % 2.36 % 2.49 % Noninterest Expense 4.39 % 4.52 % 4.39 % 4.27 % 4.45 % ROA - Pretax 2.20 % 2.19 % 2.20 % 2.08 % 2.17 % Tax Equivalent Adjustment 0.20 % 0.22 % 0.21 % 0.22 % 0.22 % Income Taxes 0.62 % 0.58 % 0.58 % 0.48 % 0.56 % ROA--After Tax 1.37 % 1.40 % 1.40 % 1.39 % 1.39 % ROE--After Tax 13.65 % 13.61 % 13.72 % 13.72 % 13.68 % Efficiency Ratio 65.76 % 66.34 % 65.49 % 65.42 % 65.86 % Noninterest Income/Total Income 36.04 % 36.33 % 36.37 % 35.53 % 36.51 % Loans/Deposits 96.06 % 96.11 % 93.96 % 94.81 % 95.84 % Equity/Assets 10.07 % 10.28 % 10.20 % 10.15 % 10.16 % Bank Profitability as a Strategic Tool Strategic Objective – Maintain Net Interest Margin in Top Quartile of Peer Overall financial performance is very good, and in Top Quartile of Peer. At this level, management sees no reason for tactical action.

  32. Exhibit 2: Testing the Spread Assumption Current Quarter CQ -1 Change CQ -2 CQ -3 CQ -4 Change PRODUCTS--COST BASIS Yield on Earning Assets--FTE 7.72 % 7.60 % 0.12 % 7.35 % 7.10 % 7.01 % 0.71 % Rate Paid on Total Deposits and Borrowings 3.05 % 2.85 % 0.20 % 2.64 % 2.45 % 2.25 % 0.80 % Spread - FTE 4.67 % 4.75 % (0.08)% 4.71 % 4.65 % 4.76 % (0.09)% PRODUCTS--MARKET BASIS FUNDS USING PRODUCTS Yield on Earning Assets--FTE 7.72 % 7.60 % 0.12 % 7.35 % 7.10 % 7.01 % 0.71 % Cost of Funds (FTP) 4.66 % 4.45 % 0.21 % 4.21 % 4.05 % 3.88 % 0.78 % Asset Product Spread--FTE 3.06 % 3.15 % (0.09)% 3.14 % 3.05 % 3.13 % (0.07)% FUND PROVIDING PRODUCTS Credit for Funds (FTP) 5.06 % 4.93 % 0.13 % 4.69 % 4.55 % 4.40 % 0.66 % Rate Paid on Total Deposits and Borrowings 3.05 % 2.85 % 0.20 % 2.64 % 2.45 % 2.25 % 0.80 % Liability Product Spread 2.01 % 2.08 % (0.07)% 2.05 % 2.10 % 2.15 % (0.14)% Maturity/Rate Mismatch (0.40)% (0.48)% 0.08 % (0.48)% (0.50)% (0.52)% 0.12 % Bank Profitability as a Strategic Tool Strategic Objective – Maintain Net Interest Margin in Top Quartile of Peer Spread in “Cost Basis” section shows slight decline, but is > peer. However, introducing FTP to each side of the balance sheet shows different perspective.

  33. Exhibit 3: Branch Profitability Q4 Q3 Change Q2 Q1 Q4 Change SELECTED RATES: All percentages are % of average deposits Credit for Funds 0.12 % 0.55 % 4.85 % 4.73 % 4.55 % 4.40 % 4.30 % Interest Expense 0.18 % 0.65 % 2.42 % 2.24% 2.06 % 1.91 % 1.77 % Net Liability Spread (0.07)% (0.10)% 2.43 % 2.49 % 2.49 % 2.48 % 2.53 % Provision for Credit Loss 0.01 % 0.04 % 0.15 % 0.13 % 0.09 % 0.13 % 0.11 % Noninterest Income (0.05)% 0.00 % 0.74 % 0.78 % 0.86 % 0.79 % 0.73 % Direct Expense 0.07 % 0.16 % 1.13 % 1.07 % 1.04 % 1.01 % 0.97 % Indirect Expense 0.05 % 0.23 % 1.11 % 1.05 % 0.94 % 0.87 % 0.88 % Corp. Overhead Expense (0.16)% (0.39)% 0.85 % 1.01 % 1.08 % 1.04 % 1.24 % Total Noninterest Expense (0.04)% (0.01)% 3.09 % 3.13 % 3.06 % 2.92 % 3.10 % Pretax Profit (Loss) (0.13)% (0.14)% 1.35 % 1.49 % 1.63 % 1.66 % 1.50 % Bank Profitability as a Strategic Tool Strategic Objective – Maintain Net Interest Margin in Top Quartile of Peer Branch profitability is demonstrating a negative trend. Indirect and overhead expense ratios are > peer, a strategic challenge. Net liability spread is < peer and declining, contributing to the negative profit trend.

  34. Exhibit 4: Money Market Product Trend Q4 Q3 Change Q2 Q1 Q4 Change All percentages are % of average money market deposits P & L: Credit for Funds 0.11 % 0.57 % 5.15 % 5.04 % 4.81 % 4.71 % 4.58 % Interest Expense 0.51 % 1.84 % 3.41 % 2.90 % 2.26 % 1.92 % 1.57 % Total Interest Spread (0.40)% (1.28)% 1.74 % 2.14 % 2.55 % 2.79 % 3.02 % Noninterest Income 0.00 % (0.06)% 0.01 % 0.01 % 0.08 % 0.08 % 0.07 % Noninterest Expense 0.03 % 0.10 % 0.81 % 0.78 % 0.70 % 0.71 % 0.71 % Pretax Profit (Loss) (0.40)% (1.41)% 1.07 % 1.47 % 2.03 % 2.26 % 2.47 % Bank Profitability as a Strategic Tool Strategic Objective – Maintain Net Interest Margin in Top Quartile of Peer Money market product spread is declining at rapid rate and is < peer. This product is the key contributor to branch spread decline. Through competitive and customer analysis performed by Marketing Department, this bank must make changes to increase spread without customer attrition.

  35. Bank Profitability as a Strategic Tool Strategic Objective – Maintain Net Interest Margin in Top Quartile of Peer Regional and branch managers incentives are aligned to strategic objective. Goal is to increase net revenue from profitability reports. Decisions made at the branch manager level are geared towards increasing spread revenue. Not any deposit balances, but the right deposit balances. Focused attention on higher profitability customers.

  36. Jeffrey P. Marsico Executive Vice President Ph: 973.299.0300 x120 Email: jmarsico@kafafiangroup.com www.kafafiangroup.com www.jeff-for-banks.blogspot.com

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