Squeezing More Margin from Your Portfolio: It’s All about Relationships

Ken Levey, Vice President Financial Institutions Software, Kaufman Hall/Axiom Software

Financial institutions continue to face tight margins, challenges in growing loan and deposit levels, heavy competition, and continued pressure on earnings. In this environment, how can bank and credit union leaders squeeze more margin from their portfolio?

The answer is by understanding relationships and the profitability they bring to your organization.

A very small percentage of relationships, typically about 1%, contribute the most value to an institution’s profitability. The loss of any of these key relationships can diminish institution health. Full relationship management is typically related to commercial accounts where an individual’s business and personal network are included in his or her scope of influence. These ties can magnify the results of any front-line interaction.

Understanding your relationships and where the value comes from is imperative to managing a profitable portfolio.

Can You Identify the 1%?

In 2019, Kaufman Hall and Financial Managers Society surveyed 114 CFOs and senior leaders in North American financial institutions. Sixty-nine percent of all respondents noted that they are not able to view the profitability components of all the accounts influenced by one customer— i.e., the relationship value of that customer. Without this baseline capability, it’s impossible to fully understand which relationships drive the most profitability for your institution.

Knowing the value of all relationships offers many important benefits that impact profitability, including the ability to:

  • Retain and expand relationships with your best customers, pricing loans and deposits appropriately and providing a commensurate service level.
  • Identify sub-par customers, who represent improvement opportunities.
  • Market products and services appropriately, including cross- and up-sell opportunities.

Once you’ve accurately defined relationships, begin analyzing their profitability.

Measuring Profitability for Institution Leaders and Relationship Managers

Once your institution can effectively build and manage relationships, it’s critical to use a robust calculation and modeling engine that measures both historical and forward profitability.

Here, the consistency is vital. You need to be consistent between historical and projected profitability, and have a consistent approach to how you analyze profitability across the organization, products, branches, and relationships. Be sure to make the data transparent, agree on methodologies for calculation and how to access the source data, and define each calculation needed (examples include Funds Transfer Pricing (FTP), Risk Adjusted Return on Capital (RAROC), provision expense, and cost allocations).

Institution leadership can get a more accurate gauge of current performance and better predict future performance based on factors such as relationship profitability of the portfolio as existing loans and deposits mature, and the effect of new business on future profitability. They can also look at the performance of each relationship manager to guide incentive compensation, inform coaching opportunities, and identify best practices used by top performers.

Individual relationship managers can prioritize their business development and account management efforts by understanding how relationships perform, and focusing extra time on the top and bottom deciles.

Unfortunately, 68% of survey respondents say their institutions lack an automated means to analyze the profitability of complex relationships. Respondents cite lack of data (45%) and lack of analytics tools (55%) as top impediments to relationship profitability analysis.

Don’t Price in a Vacuum

Building on your understanding of your client’s sphere of influence and empirical profitability, each deal you make must add value rather than dilute it.

The ability to understand how proposed new business impacts profitability hurdle rates (such as Risk Adjusted Return on Capital) and to compare pricing scenarios before making a deal empowers relationship managers to achieve a win-win for the organization and for the customer. For the institution, you create value through:

  • Enhanced earnings.
  • Retained or improved relationships (especially those in the top 1%).
  • Profitable growth.
  • An effective and efficient process for loan officer and other relationship managers.

For the client, you create value by:

  • Establishing an efficient process to make better, faster decisions.
  • Providing multiple options to best structure deals to meet their unique needs.
  • Promoting a strong relationship with the institution, focused on long-term value.

Create a Culture of Profitability

To create a culture of profitability across the organization, financial institutions must not overlook any opportunities. By bringing relationship profitability information from the back office to the front lines, your team can leverage data to drive day-to-day decisions that improve value and customer service.


Ken Levey and Bryan Ridgway will present Relationship Profitability: Unlocking Value from the Institution’s Relationships at RMA’s Annual Risk Management Conference, October 27–29, 2019 in New Orleans, LA.

Learn how technology can help: Axiom Relationship Profitability and Pricing System


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