Forecasting In The Banking Sector: How a Driver-Based Planning System Will Add Value in Volatile Times

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Forecasting In The Banking SectorHow a
Driver-Based Planning System Will Add Value in
Volatile Times

• Sales / Education

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Profile of the Potential Customer Chief
Financial Officer (of total corp. or significant
line of business)

• Responsibilities?
• Overall financial management and strategy for the
  Corporation
• Functions that generally report to the CFO
  include, controllership, treasury/ asset
  liability management, financial planning and
  analysis, financial systems administration, tax
• What are their key pain points buying questions
  
• Access to timely and accurate information to make
  decisions related to best use of capital
• Example should the bank focus on making more
  consumer loans vs commercial loans. Are fixed vs
  variable products more profitable?
• Example which business line is best performer,
  which is the worse? What action plans are in
  place to improve performance. Do the lines of
  business have the right information to evaluate
  performance?
• What are the adjacent areas of interest
• Continuing credit risks. How can we minimize
  credit risk on the balance sheet?
• One example is reducing credit limits on credit
  cards. Another might be limiting lending
  exposure in certain industries such as consumer
  retail.
• Client may want to invest in new planning system
  if they have Difficulty explaining financial
  results

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Profile of the Potential Customer VP of Finance
or financial planning an analysis

• What are their responsibilities?
• Manage the corporate planning process
• Generate the weekly monthly financial reports
  Etc.
• Analysis of financial results to budget, plan,
  prior period
• What are their key pain points buying questions
  (Please distinguish this by level i.e. CFO has
  different issues than Controller)
• Too much time and effort goes into producing a
  plan
• Use of multiple spreadsheets time consuming
  error prone
• Limited ability to run "what-if" or multiple
  scenarios quickly and effectively
• Multiple planning and reporting tools throughout
  the bank
• Data quality issues Lack "One Version of the
  Truth"
• What are the adjacent areas of interest
• Difficulty integrating merged entities into
  planning/reporting

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Profile of the Potential Customer VP or Director
of financial systems

• What are their responsibilities?
• Implementation and maintenance of all financial
  systems (G/L, Planning, profitability, FTP
  systems)
• Reporting development and maintenance
• Data integrity in financial systems
• What are their key pain points buying questions
  (Please distinguish this by level i.e. CFO has
  different issues than Controller)
• Inability to install or develop planning system
  to handle banking complexities, security
  concerns, or reporting needs
• Difficulty integrating merged entities into
  planning/reporting
• Data quality issues Lack "One Version of the
  Truth"
• What are the adjacent areas of interest
• Regulatory and financial reporting compliance
  issues

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Key Questions Trying to find interest and spark
futher conversation When you find them/here are
some questions to ask!

• What are two key questions to ask to determine if
  there is an interest in this service or solution?
• Can you easily identify the impact of new volume,
  run-off, pricing decisions, and FTP on your
  Balance Sheet and Income Statement?
• Do you have difficulty keeping all areas involved
  in the plan process up to date on the latest
  assumptions and results?
• Follow Up questions to the above
• What applications do you currently use for
  planning?
• Are multiple systems used to develop all aspects
  of the plan, including analysis and reporting?
• Are your financial analysts "data jockeys" or do
  they have sufficient time to conduct meaningful
  analysis?
• Does your system contain features such as
  real-time forecasting results, automated
  push-downs, integration with Excel/Word/Powerpoint
  , and the ability for users to share supporting
  detail and comments within the system?

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TUSC Contacts - When you get a positive
response, here are the people to bring in for
follow on conversations

• TUSC Subject Matter Experts
• Molly Smith - smithm_at_tusc.com Cell
  904-608-6605
• John Bogdue - bogduej_at_tusc.com Cell
  614-530-9941
• Dick Coulter - coulterr_at_tusc.com Cell
  614-940-5429

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Summary of our Capabilities in this area

• 2 implementations of driver-based planning in
  banking using Oracle Planning (former Hyperion
  planning)
• Multiple implementations of driver-based planning
  at banks while with other organizations (not TUSC
  or WhittmanHart)
• In depth understanding of Hyperion architecture
  Technology
• Subject matter experts with extensive experience
  building financial models for banking products
  and processess
• All SMEs have worked in banks at senior level
  positions

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Case Studies Citizens Bank

• Issues
• Current system too summarized (measures and
  granularity of products)
• Offline Excel Models needed to supported current
  system did not use consistent methodologies or
  data resulting in inaccurate forecast results
• Significant manual effort to sync with treasury
  assumption
• Reporting from both Essbase and Excel required
  additional effort and potential for error
• Requirements
• Interactive planning that reflects income and
  yield impact to portfolios as changes are made to
  the balance sheet and rates
• Tie rate and FTP changes to indices (Prime,
  Libor, swap curve, etc.)
• Incorporate methodologies and data used for ALM
  Modeling
• Multiple versions and scenarios to model growth
  and rate assumptions

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Citizens Bank Implementation outcome

• System has been successfully deployed and in use
  for over one year
• Less time on manual processes, more time on
  results analysis
• Linkage to ALM data providing deeper insight into
  cash flows
• Improved quality of earnings forecasts allowing
  the bank to PLAN and ACT, rather than REACT
• More productive management meetings focused on
  controllable drivers of business

April 13 / Slide 9 / TUSC Overview
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Citizens Bank TUSCs role and challenges

• Design, Construct and Implement a more
  streamlined Budgeting and Forecasting system for
  all Citizens entities by implementing the System
  9 version of Hyperion Planning while
• Leveraging the existing Essbase Reporting
  environment
• Integrating ALM maturity data (during a
  significant Bancware Convergence upgrade)
• Developing detailed business forecasting models
  to support driver-based balance sheet budgeting
  and forecasting
• Conducting User Interviews and Training (during a
  geographic to LOB organization restructure)
• Working within a defined technical environment of
  web servers, SQL databases and geographically
  dispersed user base

April 13 / Slide 10 / TUSC Overview
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Case Study Bank of the West

• Issues
• Excel based planning resulted in inconsistent
  results, one-off processes
• Excessive FPA staff time devoted to managing
  forms, data and consolidations
• Difficulty integrating planning results into
  reporting and allocation systems
• Manual corporate cost allocations with lack of
  transparency into methodology
• Requirements
• Driver based planning with integration of ALM
  system data
• Automated workforce and capital expenditure
  planning
• Single source for planning and reporting
  including corporate cost allocations

April 13 / Slide 11 / TUSC Overview
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Bank of the West Implementation outcome

• Less time consumed on manual process, more time
  spent in analysis of results
• Automated consolidation of results
• Linkage to ALM data provided deeper insight into
  cash flows
• New business and margins
• Integration of Workforce and Capital expenditure
  planning
• Comprehensive reporting within the planning system

April 13 / Slide 12 / TUSC Overview
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Bank of the West TUSCs Role

• Overall management of design and delivery of
  planning solution
• Industry knowledge of best practices in bank
  planning
• Develop business models to support balance sheet
  budgeting and forecasting
• Integration of ALM system (QRM)
• Provided roll-out support to all lines of business

April 13 / Slide 13 / TUSC Overview
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References

• Laura Scott, VP Financial Planning and
  Analysis, Bank of the West
• Phone [phone]
• E-mail laura.scott_at_bankofthewest.com
• Steven Kane, SVP Corporate Finance, Citizens
  Bank
• Phone [phone]
• E-Mail steven.t.kane_at_citizensbank.com

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TUSC Collateral Available

• Sell Sheet Driver-Based Planning

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Web Presentation To follow
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Forecasting In The Banking Sector

• How a Driver-Based Planning System Will Add Value
  in Volatile Times

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Why driver based planning is critical during
uncertain times

• A driver-based system will bring together
  projections from Lines of business, Treasury and
  credit/risk management
• Supports multiple scenarios to more accurately
  estimate future earnings and support
  what-if/contingency planning
• Planning is no longer an exercise but a useful
  tool for managing the business
• Greater insight into the expected impact of new
  business
• If using spreadsheets today, can prevent costly
  disconnects

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Overview of driver based planning

• Product-specific cash flow intelligencecombining
  portfolio, FTP, new volume, run-off, and
  repricing ( and ) into a single view
• Leads to increased understanding and accuracy of
  business unit forecasts
• Monitor and plan what is actionable (new volume,
  pricing spreads)
• 18 to 60 month rolling forecasts supported to
  reduce burden of annual planning cycle
• Seamlessly brings together overlapping
  information and projections from key areas such
  as
• Treasury (Index and Funding rate projections,
  portfolio run-off balances/rates/sales)
• Risk/credit management (Prepayment assumptions,
  funding methodologies)
• Business Units (new volume, pricing assumptions,
  utilization rates)
• Accurately estimate future earnings faster and
  more often, supporting what-if/contingency/multipl
  e scenarios
• Ensure prior month actual values drive future
  results
• Improve visibility into upcoming risks
  opportunities to promote faster decision making
  and adjustments

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Overview of driver based planning

• Combining all the activities (Drivers and
  results) that will affect the balance sheet and
  income statement into an integrated view
• Brings together the input and projections of
• Treasury
• Expected maturities
• FTP
• Credit/Risk management
• Charge-offs
• Pre-payments
• Lines of Business
• New business balances and rates

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Driver-Based Planning Model Smartview Form
Mortgage 15 year
Retail Banking
Software systems such as Oracle Planning
provide the ability to create Driver-based
models that assure consistency and accuracy plus,
remove the headaches involved with using
spreadsheet for planning
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Planning should provide insight into profitability

• Why are balances and margins going down for CDs?

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Planning should provide insight into profitability

• Are new CDs as profitable as maturing CDs?

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Example of what a model might look like in a
planning system
Retail Banking
12 month CDs
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Planning should provide greater insight into
profitability
Scenario One
Scenario Two Rates drop 50 bps
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If sales, maturities and interest rates drive
portfolio results, what drives the drivers?

• These are the levers of the business
• Efforts that can be influenced/controlled by the
  business units
• Levers are generally managed in a dashboard type
  reporting system but can be useful additions to
  driver-based models

Levers
Drivers
Results
of Relationship managers
Times of Sales per RM
Times amount per product
Equals New business
Times Interest margin
Equals Earnings
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Illustration of Driver-based planning
Old/ maturing Business
New Business
Total Portfolio
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Incorporating planning in the management process

• Strongly integrate the plan into the management
  process
• Continuous review of results
• Budget isnt something that is done once a year
  and put away, re-forecasting on a rigorous
  schedule keeps the plan current.
• Formal, well articulated escalation process for
  all risks and opportunities
• If you cant make a plan because of unforeseen
  circumstances, someone has to know
• Consequences for not achieving results
• Taking acceptable risks is fine, committing to
  bottom line numbers and not delivering is
  unacceptable

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Tie performance closely to incentives

• Nothing gets attention more than whats related
  to personal gain
• Plans become more useful when there is a clear
  link to incentives
• Plans need to include information that is
  controllable by a business unit
• Sales volume
• Pricing targets

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Develop Consistent views of data

• All business units look at their business in a
  way that makes sense to them (and makes them
  look good)
• Number of mail responses not very helpful to a
  commercial real estate division just as clients
  per RM doesnt translate to a Credit Card group
• While all businesses need to manage in a way
  thats effective for that type of business, at
  some level, all results need to have a common
  definition and look
• The planning system should be the only source of
  reported plan numbers
• This means that the system should have the
  ability to include performance measures in
  addition to financial numbers

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Lessons learned in implementation

• Buy-in of all stakeholders
• This is a sea-change and reflects a fundamental
  difference in how the business is run
• Business lines may have their own product models
  that need to be incorporated into the corporate
  plan
• Crisp definitions of measures
• New business definition
• Should it include renewal
• What about non-maturity deposits?
• What is included in portfolio run-off
• Contractual run-off plus attrition or prepayments?

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Lessons learned in implementation

• Document, Document, Document
• Spend the time up front thinking through
  requirements
• What level in the organization is the best for
  planning?
• How much detail should be included in the product
  hierarchy?
• Dont assume that a process that worked one way
  in the old system will work that way in the new
  one
• Test, Test, Test
• Make sure testing is done thoroughly
• Dont just test the models, remember to look at
  consolidated results
• Run different scenarios through the system
• Involve all stakeholders in testing
• Train, Train, Train
• Just because its crystal clear to you doesnt
  mean that users will understand
• Helps to go through a couple of months of test
  run before using the planning tool exclusively

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Contact Information Molly Smith smithm_at_TUSC.com (9
04) 608-6605 www.tusc.com