Is customer profitability analysis applicable for lending bankers?

The profitability of any given relationship to the bank can be reflected in the customer profitability analysis.

The financial statement analysis can only make an evaluation of the financial strengths and wekaness of the borrowing client and have little to do whether the customer is profitable to the bank.

While the customer is profitable in their own financial statments. But in its dealings with the bank the bank's cost of servicing the customer may far exceed the revenues derived from the customer.

It is therefore important to compute customer profitability in lending operations.

Contact for the customer profitability computational template


FROM: Theodoros Petrou
DATE: 26 MAY 2009

Hope you are well
I would appreciate your advice, any material or templates you may have on the following:
When conducting a Customer Account Profitability Analysis - should the costs of the support functions (cost centers) such as Legal, HR, Admin be apportioned to the operational functions (profit centers) and taken into consideration?
Is there a common methodology for apportioning the O/Hs of the support functions to the operational functions?
Thank you very much in advance

Dear Theo

  1. You should allocate the the HQ cost (as a General Overheads).

There really 4 types of costs in any product/service (that is used by the customer):
a. Direct cost (cost of staff that performs the transaction directly eg teller cost for a deposit transaction; IT cost per transaction if you have that);
b. Indirect cost (cost of staff that perform the transaction indirectly eg. supervisor of the teller);
c. Service Overheads (Cost of Manager for all supervisors; rental [real and notional]; utilities)
d. General Overheads (Cost of the CEO; Internal audit; Legal; etc)

  1. Kindly note that the CPA is calculated based on the types of products/service used by the customer and the cost of each type of products/service

Hope the clarification helps.

Thank you very much John

Dear Theo

You have a correct approach.

From my understanding of your methodology:
1. You already have calculated the product delivery time (so every product has a time based weights)
2. You will then allocate the OHeads to the products based on the time based weights.

The other element is that of the Cost of Funds and Value of Funds for each product.

If the product helps the bank to raise funds (such as deposits) then it attracts a Value of funds (like a reward given for fund raising).
If the product uses funds (eg loans) then the product will attract cost of funds (a charge for taking funds from the bank's pool of funds.

The the COF and VOF also apply when calculating the customer profitability.
When a customer places deposits then the customer should get "rewarded" with a value of funds.
When a customer draws a loan, then the customewr would be charged a cost of funds (based on the amount and COF % rate)


Dear John,

Thank you very much for your feedback.

Indeed the other component is the cost of funds. I plan to develop of FTP policy which will be agreed with all relevant stakeholders .

I will keep you updated as we progress.

Thank you very much and best regards,