Pricing/Profitability Optimization

Challenge: The ability to optimally price loans and control the profitability of each lending relationship is a cornerstone of a bank’s ability to be competitive and, in a downturn, have a stronger balance sheet than it’s peers. In order to get there, a bank needs a model that measures all components of pricing and profitability, is sensitive to stronger transaction terms and additional fee income and yields results that are generally in line with market and competitive pricing. In addition, the bank needs to be able to use these models in a framework that balances the necessary tradeoffs that must be made between returns, risk, and growth

Solution: ERisk will work with the bank’s staff to understand the nuances of all its business units, products and loan portfolios. Equipped with this information, we will provide an objective framework to quantify the income from each product and relationship and the expenses associated with that income, including fully allocated overhead and the risk costs (i.e., both expected and unexpected losses). ERisk will also identify the strongest and weakest relationships by their risk-adjusted return on capital (RAROC) and assist you with pricing for maximum RAROC in the context of the bank’s net interest margin, charge-offs and growth goals. ERisk also has the technology to implement an enterprise software solution built around these highly customized models in order to efficiently deploy these analytics throughout the organization.

Benefits: A pricing and profitability model will allow a bank to quickly and clearly quantify and rank-order the value of its relationships and make the appropriate decisions that optimize its return on capital, NIM, NCO and growth goals

For more information, please contact us.

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