Align Your Focus on Consumer Experience with Balance Sheet Optimization
December 4, 2019
3 minute read – Heading into 2020, consumer experience continues to be a top focus for credit unions and banks. Delivering the experiences that target markets value is almost universally understood to be foundational to a sustainable future. As financial institutions make critical choices in where to focus their consumer experience efforts, more are using their optimal balance sheet structure to decide on priorities.
Balance Sheet Optimization
Balance sheet optimization is a very individual exercise for each institution. A series of what-ifs can show how even subtle shifts in the balance sheet can improve earnings today while producing a more favorable risk profile over a range of different rate environments.
A critical piece of the optimization puzzle is the profitability of various product lines – this factors in more than rate. It also includes the expenses, non-interest income, and credit risk associated with each.
Once today’s profitability is established, the profitability in different rate environments needs to be understood. In an example from a recent blog, Should Your Credit Union Book Fixed Rate Mortgages, 30-year fixed rate mortgages are compared to overnight investments. The mortgages earn 93 basis points (bps) more than overnight investments in the current rate environment. We intuitively know that in higher rate environments, the mortgages will add more risk, so both the risks and opportunities need to be considered.
The analysis in the example shows that the mortgages are more profitable than overnights until short-term rates increase 200 bps, at which point the overnights become more profitable. (The institution is still within its risk limits for higher rate environments with the mortgages.) In weighing the risks and opportunities, the institution needs to decide what change in market rates is relevant for planning. If they are planning for a rate change of 200 bps or less and they’re still within risk limits, the opportunity for higher profitability in the expected rate environment may be worth the risk of lower profitability if rates rise more than 200 bps.
These are the types of decisions that are needed to determine the optimal balance sheet structure.
Aligning Consumer Experience Efforts
The ultimate goal is for key consumer experiences to be outstanding, but understanding which product lines need to grow to attain the optimal balance sheet structure can help drive which consumer experiences receive focus and resources.
Consumer experience improvements can shift balances by generating higher volumes of booked loans. In addition, some experience improvements – think effective training, better software tools, and sleeker processes – can increase per loan profitability in addition to getting more loans on the books.
Credit unions and banks are competing to create experiences that engage consumers and provide value. Aligning these efforts with the institution’s optimal balance sheet structure can compound their effectiveness and enhance the sustainability of the business model.