Jeff For Banks

Guest Post: Managing to the Margin by Mike Higgins Jr.

It’s that time of year when every CFO is trying to “predict” what is going to happen with rates as they construct their budgets for the new year. Rather than trying to predict rate changes in the budgeting process, consider a slightly different approach that manages to the margin.

In a nutshell, budget rates flat. Do allow assets and liabilities that are maturing to reprice at current offer rates, and budget growth at current offer rates too; just don’t kick any rate hikes into the budget.
Here are the benefits of this approach:
1.  If budgeting rates flat, as described above, and margin is improving, then some of it could be due to repricing at current offer rates, but it also could be because of a strengthening product mix (i.e. higher mix of loans vs. investments and/or higher mix of low cost of funds vs. high cost of funds). Either way, it presents the truth about where you are at right now.
2.  If budgeting rates flat, and margin is declining, then it may signal a weakening in product mix, or simply a weak product mix to begin with, and that will lead to some very hard questions about the direction the bank is headed. It forces the bank to confront their financial reality and identify strategies and tactics to improve it. Banks that rely upon rate hikes to hit a number in their budget scare me. It’s normally because they are covering up a weak or weakening product mix and that’s akin to allowing a sickness to go on undetected.
3.  Lastly, budgeting rates flat makes things easier to explain to the board each month. If margin stays unchanged, then there is nothing to report. If margin changes, then you can simply explain why it happened, which is a lot easier than explaining why something did not happen. Remember, you report earnings to the board twelve times a year; you won’t have to remind them in each meeting that your “prediction” about a rate hike was wrong.
On the flip-side, there is one benefit to including rate hikes in your budget; when they don’t materialize as planned, and you miss your earnings target as a result, it gives you someone else to blame.
What are your thoughts on this topic?
Mike Higgins, Jr.
Mike Higgins, Jr. is managing partner in the firm of Mike Higgins & Associates (MHA). His consultants work with clients in the financial services industry. His primary areas of focus are performance management, performance-based compensation, board education and strategic financial planning. He can be reached at (913) 488-4506 or mhigginsjr@mhastakeholders.com