ABC

Since activity based costing (ABC) was first propounded in 1987, many consulting firms have advertised their specialist services and experiences in the implementation of ABC in the banking sector.

But the dearth of available data, published or otherwise, suggests that ABC is not as widely understood and practiced in the financial services sector as one may be led to believe.
Two reasons account for this: firstly, banks find it difficult to define their products and secondly, the banks think that the dififculty may not warrant the cost.

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.