Kohl Analytics Group

AI will turn the banking world upside down over the next few years. See just how with this short article from Kohl Analytics Group.

It's budgeting season and financial institutions that don't have a robust profitability analytics solution should seriously consider putting it in the budget. Whether the future is to stay independent, acquire, or be acquired profitability analytics can have a huge impact on your future.

Jeff is right on that Neil's webinar is a must watch.

Great article by @Matt Doffing of the Financial Brand and commentary by Neil Stanley. Are rates falling because of the recent Fed Funds cut? Well, the answer could be the classic "It depends." For things tied to Prime then yes. You should see a Prime Rate cut soon as there is over a 90% correlation between Fed Funds and Prime. As for 1-year CDs, the FHLB Des Moines 1-year advance rate is down about 20 BPs between 9/9 and 9/23. Consumer loans like auto might see 10 BPs as the 2-year advance rate is down that much in the same period. Conversely, mortgages have seen a 3 BPs rise in the common 7-year advance wholesale funding benchmark. Why use the FHLB rates? That is because those rates can act as the maximum one would want to pay for funding. If you bring in CDs over this rate you are giving money away because you get it cheaper from the FHLB. An alternative to the FHLB could be the long end of the Swap curve. After all, the FHLB creates advances from Swaps. Just something to think about. https://lnkd.in/e6cg55ET

📊 **Market Rates and the Impact of Auto Lending on Economic Value of Equity (EVE)** Brian Turner at Meridian Economics publishes a fantastic weekly survey of market rates for various credit union products. His report highlights the different rates for auto loans by original term. For instance, page 3 of his report shows: - 48-month auto loans at 6.21% - 60-month loans at 6.33% - 72-month loans at 6.60% For this analysis, I’ll use his market rates, representing industry averages. Auto lending carries significant origination costs. A proper analysis dictates that these costs should be level yield amortized. Using data from Kohl’s extensive lending cost benchmarks, we see: - 48-month loans incur origination costs of ~179 BPs (basis points) when amortized. - 72-month loans incur ~132 BPs. Due to the longer amortization period, 72-month loans save about 47 BPs (179-132) in origination costs. But here's the catch—72-month loans are 49 BPs higher in interest rate than 48-month loans. That's a 96 BP (47+49) difference that can’t be explained by credit risk alone. This shows the inconsistency in auto loan pricing. More importantly, when you calculate the impact on an institution’s Economic Value of Equity (EVE), none of these auto loans add value—they all reduce it. While it’s less damaging now since funding rates have dropped ~100 BPs, many credit unions haven’t adjusted auto rates accordingly which has helped mitigate the damage. The question remains: How can credit unions improve auto loan pricing to better serve their members and protect long-term value? #CreditUnions #AutoLending #EconomicValue #MarketRates #Finance #LendingAnalysis #EVE https://lnkd.in/eEb7CADC

Another fantastic article from Chris Nichols at SouthState Bank. This explains why pricing for loans and deposits is so uneconomical. Many loan officers are incented to produce volume, not value. Here is one of many insightful comments from Chris. "It is crucial for community banks to apply RAROC pricing to loans and deposits and adjust loan compensation accordingly. The argument that “my bank is a price taker” is not convincing, because if competitors are mispricing loans or deposits, this is germane information for management. Just because your competitor is willing to deploy capital below its cost of funding, does not mean that your bank should follow." The key to this is you must KNOW if competitors are mispricing. Legions of organizations of community institutions fail to include interest rate risk, properly account for origination costs, or even include overhead in the pricing of loans and deposits. On the Kohlag.com website, there are loan and deposit calculators that use real-time market data and industry average costs to show what loans and deposits should be priced using a RAROC/RAROA framework. https://lnkd.in/eMXTu-Xi

Another fantastic article from Chris Nichols at SouthState Bank. This explains why pricing for loans and deposits is so uneconomical. Many loan officers are incented to produce volume, not value. Here is one of many insightful comments from Chris. "It is crucial for community banks to apply RAROC pricing to loans and deposits and adjust loan compensation accordingly. The argument that “my bank is a price taker” is not convincing, because if competitors are mispricing loans or deposits, this is germane information for management. Just because your competitor is willing to deploy capital below its cost of funding, does not mean that your bank should follow." The key to this is you must KNOW if competitors are mispricing. Legions of organizations of community institutions fail to include interest rate risk, properly account for origination costs, or even include overhead in the pricing of loans and deposits. On the Kohlag.com website, there are loan and deposit calculators that use real-time market data and industry average costs to show what loans and deposits should be priced using a RAROC/RAROA framework. https://lnkd.in/eMXTu-Xi

Another interesting article from the Financial Brand. It discusses the primary role of the Chief Deposit Officer (CDO). In today’s environment, the CDO is actually more important to many organizations than the Chief Lending Officer (CLO). That’s because the deposit base creates more value than lending. At Kohl Analytics, we do these calculations regularly and often see these results. This concept is consistently verified by the secondary market. During an acquisition there is rarely a premium attributed to loans, it’s to the deposits. If one attempts to sell new loan production, they often find that it can only be sold for a loss. Finally, why would big banks be offering a $500 bonus to steal your deposits but show no interest in your loans. Yet through all of this, the institution is still making money. That’s because the deposits are often subsidizing lending, yet there is enough extra value to still return a profit. When reading this article there is one thing that stands out. None of the performance metrics used for these CDOs mention tangible, stand-alone value contribution. If they had that the value of the CDO position would be very clear.

The following article from the Financial Brand fails to highlight a major problem in banking and bank marketing. The obsessed focus on growth. Growth per se is not what you strive for, it is value creation. Most marketers are shocked when they discover that loans are often value destroyers and it's the deposits that subsidize the loans and account for all profitability. For example, today’s average auto loan is about 2% below the fully risk-adjusted rate needed to be a value-contributing asset. Yet, marketers relentlessly push value-destroying loans because they don't know any better. A data-driven marketer should first determine whether the products they are pushing even create or do they destroy value. When you consider only a small fraction of customers actually create value it becomes imperative that one understands customer profitability too. Without this, you are just guessing and probably guessing wrong. This is rampant in the consumer banking space, not as much in commercial banking. https://lnkd.in/eRiuzy3B