Financial institutions faced economic and market uncertainty head-on in 2020. Leaders worked to get ahead of liquidity issues, steer clear of harmful credit decisions, help ailing customers, and steady their organizations amid a staggering economy and extreme financial market volatility.
So, what have banks and credit unions learned over the past year?
Syntellis’ Axiom™ FTP and Profitability solution improves financial institutions' visibility into their true value drivers across the organization, its branches/departments, products, officers, channels, and customers/members.
Cash flow is the net amount of funds coming in and out of an organization.
A traditional budget includes estimates of revenue and expenses to project expected profit; it is based, for example, on interest earned or paid each month. A cash flow forecast further details when receipts and payments are likely to occur.
Cash flow forecasting provides greater accuracy, accountability, and insight into performance than regular budgeting.
For a financial institution, cash flows for balance sheet planning are generated by interest income, interest expense, and runoff.
Interest income and interest expense are derived from loans and time deposits/shares held by customers/members. Runoff comes from payments and prepayments of outstanding loans.
For each line of business at the institution, cash flows are modeled at the instrument level, accurately taking into account balances and yields based on runoff projections, prepayment expectations, interest rate scenarios, and more. It can optionally include funds transfer pricing (FTP) spread.
Cash flow forecasting (also referred to as cash flow margin planning or cash-flow based planning) is used by financial institutions to better predict NIM.
Cash flow forecasting is like a marriage between Asset Liability Management (ALM) and traditional financial planning approaches — it projects balances, yields, and FTP spread (if used) to accurately inform a cash flow-based budget. This approach makes it possible to process fixed and adjustable records across all instrument types, adding prepayment assumptions so future cash flows reflect a more realistic view of customer/member behavior.
Cash flow forecasting begins by modeling cash flows at the record/instrument level, considering factors such as projected interest rates, runoffs and rates of existing balances, the impact of new originations, and (optionally) FTP rates.
The process relies on dividing the consolidated balance sheet into smaller line-of-business or profit center balance sheets. The recommended level of granularity varies with:
For each cost center-general ledger combination, a “current position” is established as the basis for cash-flow planning. For example, an auto loan portfolio at the institution’s Main Branch will have a current value, principal runoff projections (due to amortization and prepayments), and interest rates and FTP rates associated with each principal reduction. Optional “path-dependent” prepayments can be included based on interest rate scenarios modeled. Essentially, this lets you view loans and deposit records in portfolios — including those set to mature and reprice.
Cash flow forecasting distinguishes historical originations from projected new ones — taking into account interest rate levels, runoff, and new volume demand. By manipulating these centrally-managed values along with interest rate projections and planned spread, various interest rate and product mix scenarios can be run with reasonable accuracy.
Determining future cash position also requires input from business owners, most accurately informed by:
Because the foundation is the customer/member record, cash flow forecasting lets you analyze cash flow in different ways that are beyond many institutions’ capabilities, grouping instruments by cost center, general ledger, officer code, or more distinctive product categorizations (e.g. new autos from used autos).
Advance cash flow forecasting by applying FTP to the forward balance sheet. This practice has several key benefits, allowing the institution to:
A cash-flow forecasting engine must have certain capabilities to be effective and highly accurate. These include the ability to:
Axiom™ Cash Flow Forecaster makes it easy to calculate cash flow projections at the record level, aggregating them into planning portfolios to improve accuracy in net interest margin planning and provide better focus on incremental new business. Our cash flow forecasting software enables data analytics, enhances data visibility, and allows you to build a cash flow forecasting model into the standard budgeting process.
Finance leaders at many banks, credit unions, and other financial services institutions said their organizations were not prepared for the level of disruption brought on by the COVID-19 crisis in 2020. Almost no one was, but financial institutions seem to have a harder time bouncing back than some other industries, as more than half expected to miss their 2020 profitability goals, and 51% expect profitability to decline or remain flat this year.
CHICAGO – January 19, 2021 – Despite an uncertain economic climate, financial institutions showed great resourcefulness in 2020, with many indicating that existing processes and channels prepared them well to weather the impacts of the COVID-19 pandemic.
