MarketSim Reports
Dr. Tom Smythe
Introduction
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We will be looking at six reports that you will use throughout
the next 10 days with MarketSim
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All are accessed under the Results tab and are arranged by year
You will use more detailed versions of some but these are the “biggies”
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The first three: Balance Sheet, Income Statement, and ROE
Decomp, represent the bank and its performance at the bank
level
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The second group: Customer, Distribution by Channel, and
Product Financial, help you identify and measure
performance of marketing strategy
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Balance Sheet (B/S)
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Representation of what a bank traditionally does – Asset
Transformation
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Raise funding (deposits, CD’s, borrowing, equity) and deploy that
money in higher earning assets (securities, loans, credit cards)
Some funding has no interest cost (basic checking), while others do
(CD’s)
The transaction services are a cost to the bank
The B/S represents how we raised funds and deployed them as
of a point in time
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In reality, the B/S changes everyday because the business keeps going
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Balance Sheet (B/S)
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The B/S shows traditional business choices banks make
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Do we raise deposits (slower, more stable) or do we borrow (most
costly, risk of not being able to refund)
Do we deploy in mortgages, car loans, credit cards, or some mix
Non-traditional bank business (trust, investment advisory) don’t show
up on the B/S but flow directly to the Income Statement
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Risk is reflected in B/S choices
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Changes in the B/S from period to period reflect shifts in
business strategy and competition
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Bigger changes have bigger implications for changing the risk profile
AND potential changes to profits
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Income Statement (I/S)
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The I/S is a report on profit or loss
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Internally, deposit creation and lending are profitable, allowing
business areas to focus energy from a marketing strategy
perspective
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Is the bank succeeding in its strategy from an accounting perspective
Net Interest Income from Assets is the profit (loss) of lending relative to the
internal cost of funds
Net Interest Income from Liabilities is the profit (loss) from raising deposits
at price lower than the internal margin
The sum of NII(A) and NII(L)is Total Net Interest Income (TNII)
Not all assets will “perform” so the bank estimates the losses as
Loan Loss Provisions and they are deducted from TNII
Treasury Balancing Cost (TBC) represents the cost to the bank of
borrowing to meet excess loan demand or to deploy excess deposits
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Income Statement (I/S)
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Bank also generates revenue from non asset transformation things
like account fees, overdraft, ATM fees, trust services, etc.
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These are Non Interest Revenue (NIR)
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The Net of TNII, LLP, TBC, and NIR is Total Revenue
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Bank also has expenses that are related to running the business
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Internally we can separate these into variable, fixed, delivery, etc.
External viewers of an I/S will not have this detailed information – it is
proprietary and will be key to managing your business
The sum of all costs and taxes are deducted from Total Revenue to
get bottom line (from an accounting perspective), Net Income after
taxes
6
Customer Report
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Representation of the market segmentation you have for your bank
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At Risk Customers are those that your bank has but could lose due
to competitive pressures or by your strategic choices
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As you make decisions about marketing strategy, this will reflect those
choices, as well as the responses of competitors
While you may want to target Blue Collar, your ability to attract that group
will also be dependent on your distribution and product choices and the
choices by competitors
There may be times where you choose to pare a certain customer group
If you don’t intent to, this identifies those you may need to focus on
because it’s more costly to acquire a new customer than keep one usually
Contribution Per Customer measure the ability to generate profit
from each customer
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All else equal we want this to be higher
Achieved based on distribution and product mix, i.e. cross-selling
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Distribution Report by Channel
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This report gives detailed expense information for your bank’s
distribution channels for the current and previous year
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This allows you to determine if costs are rising are falling in total but also
by distribution channel
Different channels have different costs, especially fixed and variable
This information is highly dependent on which customer segments
you wish to target
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If you target retirees, you are likely to need a more robust branch network,
which will, by definition have higher fixed costs
All else equal, we want to lower costs but some distribution channels are
more heavily populated by certain groups
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Distribution Report by Channel
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As with the Customer report, this is internal to the bank, i.e. not
available to outsiders
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Number of transactions will drive Fixed and Variable Expense per
Transaction
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Fixed per should decline with more transactions and variable rise, although
often in discreet steps
The goal is to optimize (minimize) the Total Expense per Transaction
As before with Customer, your actual volume of business, and
therefore expenses, is dependent on customer target, products, and
competition
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Product Financial Report
All of the products can be categorized into three groups: Deposits,
Interest Bearing Revenues, and Non-Interest Revenues
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Deposits
Interest Bear Rev
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Checking (7 Types)
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Credit Cards
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CD’s
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Loans
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Savings
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Lines of Credit
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MMDA
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Home Equity
Mortgage
Each product essentially is an I/S for the category.
In the case of the Deposits and Interest Bearing Revenues, it gives number of
accounts and balances. These will also have Spread Revenue and MAY have
Non-Interest Revenue (fees).
Variable and fixed costs represent the people and space costs of doing business
(operating expenses)
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Product Financial Report
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In the case of the Non-Interest Revenues, the same
information is available; however, the will not
have Spread Revenue but WILL have Non-Interest
Revenue (fees).
As before, variable and fixed costs represent the
people and space costs of doing business
(operating expenses)
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Non-Interest Rev
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Annuities
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Mutual Funds
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Insurance
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Investments
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For each product, you see its profitability before taxes.
Like the Customer and Distribution Report by Channel, the products will
reflect you marketing strategy AND competition.
E.G. if you choose Millennials (customer), they are likely to be most heavily
concentrated in online and mobile (distribution) with an inclination to simple
checking, savings, car loan, and credit cards (products)
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ROE Decomp/Key Ratios
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Business choices (B/S) lead to dollar performance (I/S and others)
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By themselves, dollar measures aren’t good metrics, especially when comparing to
benchmarks/other banks.
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Scale/size matters
Ratios take scale out of the mix
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Most ratios scale (have a denominator) of assets or equity
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ROE = Net Income/Equity
ROA = Net Income/Assets
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ROA measures a bank’s ability to generate profits from its asset base
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ROE measures a bank’s return to shareholders in accounting terms
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Leverage (Assets/Equity) measures the amount a bank has “borrowed” to
fund its business
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ROE is a composite of profitability and leverage
More leverage means more financial risk
ROE = Leverage x ROA
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ROE Decomp/Key Ratios
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The Loan to Deposit Ratio is a gauge of bank liquidity
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The higher the value, the more borrowed money used
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The choice of a higher or lower value is a balancing act for management
Efficiency Ratio [Total Costs/(Net Int Inc + Non-Int Rev) measures the
bank’s cost structure
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In relative terms, a lower number is better, but profits must be sustained
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Under investing could lead to a low ratio now but may lead to lower future profits
Loan Loss Provision/Assets partially measures credit risk
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In MarketSim, it is determined by the simulation (bank level)
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In practice, managers have some discretion
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Lower numbers mean higher profitability, but possible at a future cost
Products per customer is self-explanatory
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It is a measure of market penetration
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It is less costly to cross-sell than get new customers generally
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