Analysis creates a path, guards against risks
Financial planning and analysis (FP&A) functions have become the foundation for effective strategy and risk management for the banking industry as it faces extreme volatility in tumultuous times for financial institutions.
FP&A paves the way for banks to embrace an emerging wrinkle — rolling forecasts. That promotes more agility and takes advantage of the availability of more timely data. FP&A continues to deploy effective long-term planning, which considers factors such as the Federal Reserve’s interest rate path; economic data projections for GDP, employment and inflation, and emerging risks such as cybersecurity threats and climate change.
Grant Thornton Managing Director, CFO Advisory Scott Tripp said that while FP&A still looks at historical information, trends and operational performance, the function also is becoming much more agile. Long-term planning remains a critical FP&A function, but it’s augmented with the ability to suggest quick pivots where necessary and as market events transpire.
“The future is, you’re probably going to be doing a forecast on a rigor that’s weekly or even daily,” Tripp said. “FP&A shops are going to be nimbler and run more quickly as we get into the future and have the capabilities through technology to be able to pull that together.”
FP&A functions — often in partnership with risk and asset liability management practices — also have developed continuous monitoring capabilities that serve as a shield, providing warnings of black swan threats on a daily basis, and sometimes even more frequently. The rapid bank runs that led to the demises of Silicon Valley Bank and Signature Bank show that a financial institution can be in grave danger before a quarterly or even a monthly reporting process could prepare management to react to a sudden change in circumstances.
In short, FP&A functions provide a lot of value to banking organizations across numerous time horizons simultaneously. Even in the highly compliance-focused area of meeting the requirements of important new accounting standards, FP&A plays pivotal role.
“It’s critically important in this environment for FP&A and the risk function to be closely aligned in the way that they are looking at forecasts and projections, managing asset liability and interest rate risk, and coming together with management tightly to execute,” said Grant Thornton Managing Director, CFO Advisory John Reedy. “The traditional cycles of FP&A planning are too long, and the cadence is too infrequent to allow management to react to the warning signs.”
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Staying on top of risks
The importance of good balance sheet planning
The causes of recent banking crises have varied. Capital adequacy to offset the risk of loan losses was the predominant focus following the Great Recession, while liquidity and deposit flight became front-and-center following the demise of Silicon Valley Bank and Signature Bank earlier this year.
“But these issues all tie together with effective planning and strategy in asset-liability management,” said Grant Thornton Principal and Banking Industry Leader Graham Tasman. “FP&A in banking is somewhat distinctive from other industries, where the emphasis here is on both short- and long-term investing and financing planning to drive the business. This implies that the finance function and FP&A in banking are naturally a centerpiece of the business, rather than an adjunct support role.”
“The finance function and FP&A in banking are naturally a centerpiece of the business, rather than an adjunct support role.”
FP&A also has a unique role to play in banking with respect to accounting. While the Financial Accounting Standards Board’s current expected credit losses (CECL) standard applies to all businesses that have loans and debt instruments on the books, its biggest impact by far comes in the banking sector.
The standard requires companies to hold reserves that match their expected credit losses, which are measured in part by reasonable and supportable forecasts. Effective FP&A practices can support the development of those projections, and while the FP&A function doesn’t own that accounting, it makes a valuable contribution to it.
At the start of the COVID-19 pandemic, banks stockpiled reserves as they braced for dire economic scenarios. When the economy opened back up again, those reserves were released, fueling (in part) an unprecedented flurry of merger and acquisition activity.
Now that some of those reserves have been spent and interest rates are higher, banks have changed their strategies. They’re approving fewer loans, but they’re also offering much higher interest rates on deposits in some cases. And the FP&A function continues to plan for what’s next.
“It’s critical that they’re looking at how the models are considering the rapid change in economic conditions and making sure they’re pushing deeper on stressed scenarios in those models and in stress testing in general,” Reedy said.
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More long-term planning issues
Driving rate-setting and deposit stickiness
The way that banks go to market is deeply affected by the current volatility, and FP&A teams are providing detailed analysis to chart the best path forward.
They’re comparing projected scenarios with current metrics on credit losses, deposits, and liquidity to enable management to make the best decisions for the future.
“All those factors play a role in how you go to market and your competitive stance,” Tripp said. “You can offer higher rates [on deposits] — does that put an unhealthy strain on your organization, or does it allow you to be competitive because you’re doing it as a volume play in attracting deposits?
“In this environment, FP&A needs to challenge what’s coming from asset liability management teams and credit risk teams when they think about rates and rate-setting.”
Meanwhile, if a bank is looking at growing its business and increasing its balance sheet, it’s important to continuously monitor capital adequacy because growth can drive capital ratios out of line. In addition to rates on deposits, banks should be considering the credit risks associated with higher interest rate resets on commercial and consumer loans, as well as the stickiness of deposits. And when banks are considering new product or service developments, as well as contemplating eliminating products or services, FP&A also should have a role to play.
When necessary, Reedy said, FP&A leaders need to challenge the other areas of the organization.
“That integration with risk is critical,” he said. “In this environment, FP&A needs to challenge what’s coming from asset liability management teams and credit risk teams when they think about rates and rate-setting. Make sure they’re really considering and diving a layer deeper into the impact of those potential rate changes.”
Keeping a watchful eye
Continuous monitoring is critical
The timing of FP&A’s actions within the banking sector varies greatly depending on the function being performed. Long-term and mid-term planning is still an important part of the role, but many financial institutions are also creating rolling forecasts that are more frequent.
More than one-third (36%) of finance function leaders polled in Grant Thornton’s CFO survey for the third quarter of 2023 said their FP&A teams update their forecasts at least weekly based on existing conditions.
Tripp said traditionally, a lot of FP&A has been done through antiquated processes via Excel spreadsheets or decentralized systems that were cumbersome to bring together data and create a view of the future. That’s no longer the case, as manual spreadsheet manipulation is being eliminated in integrated systems that enable analytics and scenario planning through predictive artificial intelligence with visualization and dynamic dashboards.
“Systems are now fed in a continuous fashion that provides for near-real-time consumption or vending of data.”
This helps FP&A monitor KPIs for important trends that may require quick strategic pivots or risk mitigation. The complicated, deep long-term strategy planning that comes from FP&A requires more input and consideration than any department can accomplish within a day.
At the same time, finance organizations are rapidly developing new technological options that make speedier analysis easier. Artificial intelligence, machine learning and data analytics technology are being implemented rapidly by finance leaders and will provide analytical and predictive perspectives that would have been unimaginable a decade ago.
“Systems are now fed in a continuous fashion that provides for near-real-time consumption or vending of the data,” Tripp said. “Then you’re able to show that in a dynamic fashion, running scenarios and toggling to see dashboards that make the data easy to interpret and tell the story.”
It’s difficult to imagine that market conditions will be more volatile in the future than they have been for the last four years. But regardless of the environment, this technology may provide FP&A functions with the tools they need to manage risk and drive growth.
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