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Benchmarking with a Purpose

Benchmarking with a Purpose. Ask 50 people what is important and what should be measured. You will get 50 different answers. Objective: Develop a benchmarking framework to guide leaders toward key aspects about strategies and operations.

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Benchmarking with a Purpose

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  1. Benchmarking with a Purpose

  2. Ask 50 people what is important and what should be measured.You will get 50 different answers.

  3. Objective:Develop a benchmarking framework to guide leaders toward key aspects about strategies and operations.

  4. Objective is not:Detailed process metricsDetailed market analytics(narrowly focused; difficult to collect/compare)Internal policyRegulatory requirements(no universal standards; subject to interpretation)

  5. Benchmarking must be a part of your planning process.Difficult to set a course, and monitor environment withouta reference point.

  6. Why ROA is a horriblebenchmark of success…

  7. Singular Profit Mandate Maximize Return

  8. Credit Union Dual Mandate Minimize ROA Provide tangible benefit to members Maximize ROA Stay adequately capitalized

  9. Priority #1 Should Be… • Credit Union • Sustainability • Long Term Survival/Prosperity • Recurring Value for Members • Job Security for Employees

  10. Industry Dynamics Circle of Life or Spiral of Death

  11. Slow Death

  12. Sustainability

  13. Prosperity

  14. Grow CapitalFaster thanAssets or Die!

  15. Benchmarking requires everyone on the “same sheet of music”

  16. Sustainability Benchmarks Growth Product Mix Interest Rates Capital Growth (ROE) ROE Must Meet or Exceed Asset Growth Operating Expense Credit Losses Capital Adequacy

  17. Growth Product Mix Interest Rates Operating Expense Credit Losses Capital Adequacy

  18. The battle is NOT won or lost on the income statement; it is won or lost on the balance sheet.Income statement is what has happened;Balance sheet is what is going to happen.Where do you want to go?

  19. Establish Target Product Mix Lowest Strategic Value Highest

  20. Chart Current Product Mix

  21. Identify Product Mix Gaps Years to Target at 5% Growth Rate 5.6 YearsAway 4.3 YearsAway 5.1 YearsAway

  22. Understand Implication of Gaps 75 bps Improving product mix improves ROA by 75 bps

  23. Establish Target Offer Rates

  24. Growth Product Mix Interest Rates Operating Expense Credit Losses Capital Adequacy

  25. Efficiency Ratio Efficiency Ratio Ranges > 100% Failure is Imminent 90-100% Slow Death 80-90% Skating on Thin Ice 75-80% Surviving 70-75% Thriving 60-70% Highly Productive <60% Extremely Productive (or getting greedy) • Efficiency Ratio Operating Expense as a percentage of net revenue $75 Operating Expense / $100 Net Revenue = 75% Efficiency = 25% Remaining to cover credit losses and provide capital growth

  26. Activity Balance • Loan Balance, plus • Relationship Funding Balance, plus • Non-Interest Income Equivalent Asset Balance(Non-Interest Income / Net Interest Margin)If net interest income was an asset,how big would it be?

  27. Activity Balance Benchmarks • Expense as Percentage of Activity Balance(expense leverage into strategic drivers) • Activity Balance per Branch(branch network leverage) • Activity Balance per FTE(human leverage)

  28. Operating Expense

  29. Growth Product Mix Interest Rates Operating Expense Credit Losses Capital Adequacy

  30. Asset Quality Pipeline

  31. Growth Product Mix Interest Rates Operating Expense Credit Losses Capital Adequacy

  32. Peer Groups Thoughts… • Rule #1: Perfect peer does not exist (Sasquatch) • Population: 10-30 Peers • Span of Data 3-5 Yr History(NEVER Annualize Current Year) • Asset/Branch Peer • Geographic Peer • Charter Peer • Custom Peer • Mixed Peer • Tradeoffs exist; can’t be best at everything. Growth Product Mix Interest Rates Operating Expense Credit Losses Capital Adequacy

  33. Local/regional peer may be best. Growth Industry best practice peer (indifferent to location) Product Mix Local/regional peer may be best. Interest Rates Equivalent asset/branch peer may be best. Operating Expense Local/regional peer may be best. Credit Losses Capital Adequacy Local/regional peer may be best.

  34. Growth Product Mix Interest Rates Operating Expense Credit Losses Capital Adequacy

  35. Member Value Assessment • Member value is created when: • Product mix is stronger than peer/target • Interest rates are favorable to members (ROA drag) • Productivity is greater than peer • Credit losses are fewer than standard(s)

  36. 0.35% 0.35% Reduce member favorable pricing.

  37. Benchmarking with a Purpose

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