The banking industry is full of hope with expectations of higher interest rates and decreased regulation. However, banks and credit unions still find themselves mired in one of the most challenging environments in history—an environment that is wrought with significant competition, substantial regulatory requirements, increased consumer and technology demands, and a prolonged period of languishing financial results:

  • Net interest margins for banks and credit unions continue to stagnate at near all-time lows1
  • Quarterly bank earnings demonstrate a lack of consistent growth, fluctuating between $37.5B in 2012 to $39.1B in 2016 (with a high of $43B and a low of $34.4B)2
  • The banking industry’s average Return on Equity has not exceeded 10 percent since 2007, while it had not dropped below 10 percent in the previous 15+ years

Given these trying operational and financial times, one might think that profitability analysis would have been a focal point within financial institutions during the past few years. However, as was recently expressed in a Financial Managers Society article: “On the one hand, the prevalence of stagnant net interest margins across the industry suggests that community institutions would be desperate to get an accurate picture of exactly where the potential profits lie within their product lines and customer bases, and to work to capitalize on those opportunities. However, what passes for profitability analysis in many institutions today probably isn’t going to reveal those answers. 3

There appears to be a resurgence around the need for better profitability analysis within the banking industry in the face of this challenging environment. In a recent survey of more than 350 global chief financial officers and senior finance professionals, 73 percent of bank and credit union respondents indicated that they are looking to improve their capabilities in profitability measurement and management across various dimensions (branch, product, customer, channel, etc.).

In order for your institution to maximize its performance in this difficult environment, it is critical that you understand its sources of profitability, as well as the opportunities to improve profitability within each segment of your institution. Instead of focusing solely on growth, your institution should be focusing on profitable growth by generating information and metrics that are used in strategic and tactical decision making across all levels of the organization.

You may also be interested in the second and third installments of this blog series.


FRED Economic Data, St. Louis Fed and CUNA


3 Financial Managers Society: “Perspectives on Profitability.” FMS Update, July 19, 2016.