Unlocking The Latent Value of Bank Branches
Profitability is a fundamental requirement for every business and banks are no exception. Unfortunately, poor corporate governance, unstable regulations, global financial crisis, and increasing competition have adversely affected the profitability of Nigerian Banks. Many bank managers are asking the following questions:
- Is it possible for each branch to turn a profit?
- How can we optimise the profitability of the bank?
- Can the process of achieving profitability be run seamlessly?
“The BANK is the BRANCH, the BRANCH is the BANK”
– HSBC Survey Report
The Gestalt law states that “The whole is greater than the sum of its parts.” In other words, every simple interaction is important for the complex whole to function— we found this true for the banking industry. Specifically, our findings showed a strong correlation between branch performance and bank profitability.
Essentially, the branch is a miniature representation of the bank, and the bank as a whole can only be profitable when its individual branches are profitable. Although subject to external factors, profit hinges on the actions of employees in every bank branch. This implies that one poorly performing branch can have an unimaginable effect on profitability.
Every Branch Must Pull its Weight
Recently, the bank branch has been relegated to an inconspicuous role in retail banking with consumers migrating to mobile and online banking channels en masse, and tough economic times forcing banks to reduce branch network to cut costs.
Despite these trends, the retail branch remains the leading source of new product sales and account relationships for the majority of commercial banks in Nigeria. However, it is also by far the most expensive channel. It is estimated that the cost of branches and related staff makes up as much as 64% of all non-interest expense for the average bank. With the retail branch being both the most potentially lucrative and the most expensive channel for banks, it’s critically important that banks optimise this investment.
In our study, we carried out a detailed comparative analysis of the profitability and efficiency levels of various bank branches. By analysing branch competencies and deficiencies through the application of an industry-tailored Branch Effectiveness Assessment (BEA), our goal was to develop an effective model for measuring the relative efficiency and achievable development proficiency of selected bank branches.
The BEA is based on 4 key components: Customer, Employee, Financial and Operational. Metrics related to these four generate a simple Profitability Index as follows: PI= Σ (C+E+F+O) where C,E,F,O = n and n is any variable selected based on Pf:Im from the Branch Success Profile (BSP).
Branch Effectiveness Assessment
Our assessment tool demystifies the profitability puzzle for branches, revealing trends that can be managed under the four main factors (customer, operations, financial, and employee) to drive both profitability and growth. It also provides banks with answers to four of their most frequently asked branch profitability questions:
- How do we transform new branches into profitable business hubs as quickly as possible?
- How do we maximize the investment in people and infrastructure to achieve the expected ROI?
- How many active customers, using what number of products, will be required to guarantee branch profitability and growth?
- How can we involve every branch employee in selling, dramatically increasing sales without increasing current staff costs?
Best Practices for Branch Performance
By calculating the PI (Profitability Index), we were able to measure all test branches on a relative efficiency scale, profile industry drivers of high-performance, and generate insight to boost profitability across the different high-priority ratios within the industry. Our research also identified five common best practices across the top-performing branches. The leadership of these branches consistently:
- Evaluate branch performance in terms of profit, growth, customer satisfaction, and risk.
- Assess the immediate environment and economy to determine the unique market opportunities for the branch to focus on.
- Analyse the competitive landscape of the branch and develop an appropriate branch strategy to confront both market and competitive realities.
- Develop branch staff and ensure they are adequately informed about market opportunities, branch strategy, products, and branch performance.
- Set specific goals—realistic but reaching—for the branch and for individual employees.
The Profitability Improvement Intervention
To further validate our research, we deployed learning interventions to address specific profitability drivers across some test branches and compared the results after three months to other branches within the same bank.
Adopting a three-step approach (refer to the diagram below) the analytics-based branch Profitability Improvement Intervention showed significant improvement in key profitability indicators across all the test branches.
This three-step approach is designed to help the banks focus their branch efforts on proactive outreach that will move prospects effectively through the sales cycle and deepen relationships with current customers. As a result, branches will be better positioned to achieve unique sales goals while maximising their contribution to the overall profitability of the bank.
Are you ready to start driving your bank’s overall profitability? By employing tools like the Branch Effectiveness Assessment and the Profitability Improvement Intervention to evaluate and improve branch performance, you can start ensuring that each and every branch is truly carrying its weight.
Need for clarifications or insights? Get in touch with us.