Client profitability optimization

Automated daily evaluations

Scenario engine

Strategic tuning

Proces, control and resource optimization

Regulatory significance

Full documentation

Much of the income in retail banking arrives from interest rates and fees from loans, credits and guarantees. These rates and fees are typically determined by financial advisors. So, at the core of effective retail banking is supporting financial advisors with effective decision-making analytics to assess profitability adequacy of clients and potential changes - this is one key features of the AQClients360 application.

AQClients360 is a primary daily application for financial advisors. Every time potential new clients are assessed or existing clients are evaluated, when granting new products or when renegotiating client terms - they rely on AQClients360.

The application typically has hundreds or even thousands of daily users in a financial institution. Advisors can review the overall client profitability as well as performance on individual products and clients as well as on group level. The application offers high flexibility, to easily apply and evaluate a wide range of potential client changes with profitability consequences available instantly. This allows advisors to simulate effects from different actions to support optimal decision-making including suggesting appropriate rates, based on comprehensive algorithmic client evaluations.

When new products or collateral are added or existing products and collateral are excluded, changes in capital requirements are calculated on-the-fly and the application even supports advanced internal rating-based (IRB) capital models.

The governance processes typically associated with granting and renegotiating credits, loans and guarantees can easily be incorporated, such that when advisors exceed client limits, approval processes can include branch office directors and senior management. In some cases, the credit department is included in the granting and renegotiation process and they can access any client assessment when needed. The flow is illustrated in the figure below.

flow

When providing financial advisors with client profitabillity optimization technology, it offers different value-creating business benefits.

Supporting advisor insight and behaviour helps tune branch offices via optimal client management, and it typically yields a high increase in base profitability, it includes full documentation and supporting a more effective granting process.

Another value-creation from the application is the speed by which the client profitability can be performed.
Besides assessing existing clients - potential new clients can also be assessed very fast and easily pre-screened and rejected, in case the business case is not viable. This will save a lot precious time with financial advisors and avoid redundant data.

Traditionally retail bank clients are assessed manually and only in relation with new granting or (often annual) renegotiations. So evaluating clients is a resourceful and infrequent task. This means retail banks often have client "black-boxes" - where the status of the vast majority of clients is not uptodate.

A great feature and benefit of AQClients360 is the batch process which automatically evaluates all clients and aggregated effects on a daily basis. The automated calculations and assessments yield a number of important and highly value-adding advances:

  • Automated daily assessments of profitability adequacy across all products, clients and on aggregated levels.
  • Significant shifts in client profitability - perhaps due to change in rating or maturity/redemption of highly profitable products - is automatically detected and reported.
  • Enables a high level of client proactivity and allows for dealing with potential client issues when conditions arise and before they deteriorate.
  • The batch calculations not only calculate effects from current conditions, but also assess profitability consequences from using estimated interest rates suggested by AQClients360. Effects from single products to bank level are readily available.
  • All application data and results are readily available and can easily be fully automated and integrated in internal reporting and BI or exposed in other systems.
  • Assessing all clients systematically and automated on a daily basis, not only helps internal client management – it is also an extremely powerful signal to the regulatory authorities, as well as key stakeholders.
  • Performing automated assessments frees up internal resources.

Clearly, continuous attention on all clients is a great improvement over current approaches where clients are most often only systematically and carefully evaluated in granting and renegotiation circumstances. Being able to act more alertly, as soon as credit quality deteriorate and other adverse developments appear mitigates lots of potential problems and credit related losses.

While automated daily evaluations take into account existing clients and calculation properties, the scenario engine generalizes calculation assessments as client and calculation settings can be changed for whichever analysis is required.

With the batch calculations and the ability to apply more generalized ad-hoc analyses, like changing return requirements, capital requirements, cost and funding structures, client ratings, PDs etc. AQClients360 is also an important application to staff functions and Management, as it reveals sensitivity to an array of potential business changes, which can be applied for many business and regulatory purposes.

The scenario engine can run automated in batch with the same set of stres/scenario scenarios every day, or they can be performed ad-hoc when specific scenarios are required.

An example could be that the consequences of the covid-19 pandemic is to be investigated. That scenario may include changes in client ratings, PD and LGD levels as well collateral values.

Client assessments in AQClients360 are based on algorithmic pricing, which allows for strategic tuning. Strategic tuning means client pricing can be systematically and strategically differentiated across a wide range of client characteristics - subject to strategic management preferences and risk appetite.

Some examples of dimensions where strategic tuning can be applied include: regions, branch offices, products, ratings, age, client segments, sectors etc.

If for instance credit concentration to a certain sector is deemed too high, Management may impose stricter strategic tuning and substantially higher return requirements to that particular sector, which will result in less exposure over time and/or stronger returns to account for the added risk due to sector concentration.

The strategic tuning is seamlessly embedded in the pricing with no added work for advisors and other users.

When implementing AQClients360 - existing processes, that may be quite manual, can often be alleviated or completely automated. For instance, when controlling new granting or renegotiations from branch offices, all input and results are available digitally and can be accessed and controlled automatically.

Besides providing new insights and supporting better business decision-making, the application reduces resources significantly on several fronts.

Obviously, the process and control automation mentioned will reduce resource requirements. Other areas include client profitability assessments which can be performed in a matter of minutes, automated daily evaluations via batch process mean that lots of typical manual tasks in credit and controlling departments can be significantly reduced - furthermore the scenario engine allows for easy and fast ad-hoc analyses, which would otherwise require a significant workload.

AQClients360 has some clear-cut regulatory advantages.

To avoid having client black-boxes and automatically being on top of profitability of all clients on a daily basis and being able to repond quickly when client deterioration initiates is a gigant leap forward and very convincing to the FSA.

Regulators are increasingly focused on financial institutions utilize sound and systematic risk/capital-based pricing with strategic return adjustments of corporate and private clients and thereby assuring that credit exposures are appropriately priced in alignment with risk appetite.

The application also provides valuable input to the internal capital adequacy assessment process (ICAAP) via the scenario engine, where scenarios are easily and comprehensively performed. This allows for precise capital adequacy assessments reportede to the FSA.

Furthermore, all client assessments and pricing is fully documented.

AQClients360 provides different documentation sources for client assessments.

It provides a digital audit trail, such that all client assessments are saved and can be retrieved in the application.

It allows for financial advisors and others to pdf the assessments and append them as documentation to centralized client systems.