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How Financial Institutions can assess the overall conditions for generating the net yield on the assets

Published: June 11, 2013 by Guest Contributor

By: Joel Pruis

I am going to take some liberties here.  Nowhere in the movie Moneyball does Peter Brand tell us how he got to the magic number of winning 99 games to get to the playoffs.  My assumption is that given the way that he evaluates the Oakland A’s, he also evaluations the other teams in their conference.  Assessing the competitive landscape provides Brand with the estimated runs their opponents will generate.

Now we could take the approach that such analysis would correlate to assessing how your competition is going to perform but I am going to take a different approach.  I would compare the conference assessment in Moneyball to be similar to an economic forecast/assessment.  We need to assess what are the overall conditions in which we must operate that will allow us to generate the net yield on the assets of our financial institution.

Some of the things we need to assess to determine what we will be able to generate related to the net yield on assets would be:

  • Gross yield on assets
    • Current interest rate environment (yield on treasuries, federal home loan bank, etc.
    • Interest rate trends (increasing, declining, trends toward fixed rates, variable rates)
  • Industry information
    • General trend of businesses across the nation
    •  How are businesses faring?
    • How well are they paying their creditors?
    • Are they relying more or less on credit?
    • Are new businesses being started?  Are they succeeding?  Are they failing?
    • General trends (same as above) within your financial institution’s market footprint

One such source of the industry information is the Small Business Credit Index generated by Experian & Moody’s Analytics. In the recent release of the Small Business Credit Index, small business is indicating stronger from the prior quarter moving from 104.3 to 109.  But this is from a national perspective.  Depending on your financial institution, it is important to always get an overall view of the economy but more importantly, what is happening in your particular market footprint.  Just as the Oakland A’s in Moneyball maintained an overall perspective of Major League Baseball, their focus for success was targeting their specific conference to reach the playoffs.

So as we look at information such as the Small Business Credit Index, we are able to see highlights of regional trends (certain states west of the Mississippi are doing better while certain states along the east coast are not) and specific industry trends.  From such data we need to drill down into our specific footprint and current portfolio.  We need to review such items as:

  • What industry concentrations do we have that are doing well in the economy and how is our portfolio doing compared to the external data?
  • What industries are we not engaging that may provide a good opportunity for our financial institution?
  • What changes are taking place in the general economy that may impact our ability to achieve our expected results?
  • What external factors must we be monitoring that may impact our strategy (such as the impact of Obamacare and how it will impact the hiring for businesses with more than 50 employees?)

Just as in Moneyball, Brand continues to monitor the performance of the overall league (and the individual players for future trades), we need to continually monitor the national, state and local economies to determine what adjustments we will need to make to achieve our strategies.

So we have assessed the general environment, on to strategies or “How do we win 99 games with a total payroll of $38 million?”

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