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Reconsider your return on assets strategy

Aug 02, 2022
By: Danielle M. Heidemann

A primary strategy for most financial institutions is to increase or maintain a solid return on assets (net income after-tax/asset). To effectively grow your financial institution and increase the return on assets, your after-tax income must grow at a greater rate than your assets.  

While the objective to make more money seems simple in theory, your financial institution may find the reality to be far more complex. Many institutions we work with see this formula and immediately get to work on reducing expenses rather than focusing on increasing net income. They reduce staff and lean on remaining human capital to their limits, and sometimes beyond. They sharpen their pencils, so to speak, to cut as low as they can go and still fall short of expectations.

Barriers to greater returns

While expense control and reduction are imperative, solely focusing on this piece of the puzzle can lead to unintended consequences:

  • Senior management is focused on completing day-to-day tasks rather coaching talent and achieving strategic objectives.
  • A lean staffing model relies on predominately manual processes instead of leveraging technology to reduce the burden on human capital.
  • Commitment to a traditional or extensive brick-and-mortar branch network increases nonearning assets and creates additional expenses, even when operated as lean as possible.
  • Discretionary compensation or bonus plans do not align with achieving strategic objectives and may also demotivate participants.
  • Economic events, such as inflation and labor shortages, increase expense despite best efforts to manage.

We invite your leadership team to consider a holistic approach. Using peer data, financial institutions can gain a clearer understanding of factors contributing to this stall. Common reasons include:

  • Deposit and loan activity are not growing at a sufficient or appropriate rate to support the current infrastructure of branches and staffing.
  • Loan quality is deteriorating, which reduces interest income and requires earnings to be allocated to the loan loss reserve.
  • Overly conservative lending is resulting in a lower overall return on assets and causing a drag on the net interest margin.
  • A non-risk-based approach to investing is inappropriate for the financial institution, leading to poor investment performance in the portfolio.
  • Retirements and a highly competitive employment market are causing the cost of human capital to increase, despite best efforts to reduce expenses.
  • Lower loan-to-asset rates indicating liquid/investable assets are either left uninvested or held in  lower-earning cash and investments options.

Understanding areas that are creating the drag on the return on assets, determining your financial institutions’ key performance indicators (KPI) to monitor overall performance compared to peers, and developing strategies to address specific areas that collectively impact the KPI will provide more valuable insight related to achieving strategic objectives than focusing on a single-area reducing expenses.   

What your peers are doing

Using a peer comparison report, like Wipfli’s Financial and Operations quarterly subscription, can provide valuable data and consulting input to evaluate performance as soon as data is available to assist with tracking progress toward strategic objectives.

Intentionally and strategically managing activities and allocating resources, along with timely monitoring of progress toward objectives, can create meaningful improvement in return on assets.   

How Wipfli can help

Working through the complex challenges of improving return on assets requires the right professional team to help you meet your strategic objectives. Wipfli consultants have the experience and cutting-edge insights to support you in developing a winning approach. Contact Wipfli to learn more about how to bolster your strategic plans for securing greater after-tax income at your financial institution.

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Author(s)

Danielle M. Heidemann, CIA
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