We have yet to work with a bank or credit union client who has mastered the art and science of establishing clear, accurate, multidimensional views of cost and profitability. Most organizations strive for it but never fully achieve it. Some larger banks have set up elaborate cost systems and approaches designed to achieve this elusive goal, only to struggle to keep the information current, simple enough to understand, and relatively accurate. The profitability views typically desired can include any or all of the following:

  • By customer (account, relationship, etc.)
  • By product (loans, deposits, insurance, investment, etc.)
  • By distribution channel (branch, small business lending, corporate banking, ATM, web banking, etc.)
  • By functions or business processes (end-to-end lending, sell/open new business, maintain/service existing business, close business, process transactions, etc.)
  • By line of business (retail banking, middle market lending, CRE lending, mortgage lending, information technology, etc.)

In attempting to better understand various aspects of profitability, some banks invest heavily in technology, analytics, and other overhead, and they develop elaborate cost-accounting and allocation methodologies. It is always a balancing act between how much can be invested, the degree of accuracy perceived to be needed, and obtaining and keeping buy-in from key stakeholders. For most small and mid-size banks that aren’t in a position to make big investments, it is an ongoing struggle, and they settle for educated guesses.  

Nolan’s Bank Performance Study is a step toward a better grasp of bank profitability at the line-of-business level and beyond. Nolan guides study participants on breaking down enterprise-level income and expense data horizontally across various lines of business and functional areas, and vertically within these areas. Apples-to-apples comparisons can then be made between participants across more than 700 resulting ratios. Funds transfer pricing methodologies can also be applied in order to provide a more precise view by allowing for charges and credits between lines of business (for example, expense and income generated by deposits or other liabilities associated with a given loan type). With the inclusion of other key components — such as volumes, balances, and FTEs — the ratios are calculated and compared to the averages and benchmarks for peers.

Although the Nolan Bank Performance Study is no substitute for an elaborate cost-accounting or allocation and profitability program, it provides a new perspective and is a great starting point in striving for that ever-elusive goal of multidimensional profitability views. First-time participants find that assembling the data is more than worth the effort because of the new insights gained into profitability and productivity. Repeat participants, having already created a framework for the data, find the ability to see year-over-year trending invaluable. We welcome your ongoing feedback and participation.

This year’s data is being tabulated now. Even if you did not submit your data for the study, you can still submit it now and we can provide you with a comparison of your results against the benchmarks. If you would like additional information on Nolan’s Bank Performance Study, please contact me at mike_meyer@renolan.com and visit our website at www.renolan.com/bank-benchmarks.