RMA-SOCL: A Practical Guide to Pricing for Risk (Craig Poms)


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RMA-SOCL: A Practical Guide to Pricing for Risk (Craig Poms)

  1. 1. A Practical Guide to Pricing for RiskCraig PomsEVP, Chief Delivery Officer
  2. 2. Introductions & HousekeepingCarl RydenCEOcryden@precisionlender.com980-297-7110Craig PomsEVP – Chief Delivery Officercpoms@precisionlender.com980.297.7103PrecisionLender provides world-classloan & deposit Pricing ManagementSolutions to financial institutions.Clients – ~143 banks with assets from $50 million to over $180 billion.Usage – ~3,600 lenders and managers pricing $6 billion in commercialloans each quarter and growing.Experience – Direct experience deploying pricing solutions to over 500financial institutions.Please – Questions and comments are ALWAYS welcome AT ANY TIME.
  3. 3. It is All About RiskAbsent an illegal or immoraluse of the funds, all we careabout is getting repaid asexpected.
  4. 4. Why don’t we think aboutpricing the same way?Shouldn’t we apply the samerisk assessment when weprice?
  5. 5. We would like to propose a namechange
  6. 6. RAMAThe Risk Acquisition andManagementAssociation
  7. 7. It is as much about how we AcquireRisk as it is about how we ManageRiskIsn’t this how we make money?
  8. 8. Risk Acquisition is not just about Marketing and SalesIt is also about how we use Pricing inthe Risk Acquisition Process
  9. 9. Using Pricing to proactively acquire and manage riskis sorely missing in most banks today
  10. 10. How Do You Price Today?
  11. 11. What we hear…“As long as we think we will get paid back, we will take almost anything.”“The good deals are so incredibly competitive. Sometimes I’m scared when we WIN.”“I’m not sure that we are appropriately incorporating risk into our pricing. ”
  12. 12. From one of our client CFO’s:“In my 35 years in banking, what I have found to be true is that youtend toWin the Most, What you Misprice the Worst.”
  13. 13. How Would You Like to Price?
  14. 14. What we hear…“You want to be a price maker, not a price taker.”“You can’t bring emotion into pricing. The pricing has to have structure.”What should drive our pricing?
  15. 15. The Pricing Dynamic TM
  16. 16. The Pricing DynamicWe have been talking pricing with banks formany years and here is how we have come tothink about Pricing:
  17. 17. profit from precision – compete with confidence TMOur View of the Pricing Dynamic…17CompetitionPricingPortfolioRelationshipRelationshipRelationshipProfitabilityGoalsPortfolio Needs / Relationship Awareness
  18. 18. ImpactPricing loans anddeposits is the mostsignificant thing banksdo every day.Pricing is at the center of whatyou can manage.It is where the rubber hits the road – where your strategymeets execution. It is the most important lever that youcan pull as it directly and tangible impacts:Wins – Pricing determines which deals you win, whichdeals you lose.Profit – Pricing determines how much you get paid onthose that you win.Type – Pricing determines what types of deals you win(asset quality, duration, risk, collateral, rate structure etc.)Quality – Pricing determines the quality of the resultingrelationship.
  19. 19. Pricing Environment
  20. 20. Today’s Concerns#1: Low point in the rate cycle
  21. 21. Today’s Concerns#2: When rates will rise
  22. 22. Today’s Concerns#3: BASEL III will increase Tier 1capital requirements#4: Capital is scarce
  23. 23. So What Can You Do?Adopt a pricing system based upon risk-adjusted ROE targets
  24. 24. How is Pricing Used Today inYourBank?
  25. 25. How is Pricing Used Today in YourBank?Is it reactive to the competition?- You don’t match the competition intheir assessment of credit risk, then whymatch their assessment of pricing risk?
  26. 26. How Should Pricing Be Used Todayin Your Bank?Is it used proactively to build theportfolio that you want to live within terms of both interest rate risk andcredit risk.
  27. 27. How Do You Factor In Risk Today?Can you accurately adjust pricing for:Credit Risk?Interest Rate Risk?●Collateral Risk?Guarantees?
  28. 28. How Do You Factor In Risk Today?Can you quantify the effect on your rate for:Credit Risk?Interest Rate Risk?●Collateral Risk?Guarantees?
  29. 29. What About Accounting forRelationships?Can you quantify the Strategic Value of your Relationship?Multiple loan facilitiesDeposit accounts●Other fee based business
  30. 30. Pricing Management System
  31. 31. AnAn effective Pricing Management System should have:+Profitability Modeling:• Industry standard math• Fully incorporate risk• Price full opportunitiesOn-going Management:• Proactively manage relationships• Manage products over time• Create & manage rate sheets• Comprehensive pricing reportsMeasure & Monitoring:• Real-time dashboards• Continuous relationships ranking• Monitor published rate sheets+1 2 3The Fundamental Components
  32. 32. AnAn effective Pricing Management System must have:+The Critical ComponentsEase of Use / Actionable Results• Intelligently guides & suggests alternatives• Lenders immediately see what drives profit• Empowers lenders to winTrust & Transparency• Never a “Black Box”• Consistent with common sense• Engages credit, risk, finance and sales / lending
  33. 33. • A disciplined and objective methodology to set loan prices based on riskis a necessity. Many banks pay lip service to this requirement but toooften cite the need to match the competition as a reason not to abide byit.To be effective, loan pricing should take into account the entirecustomer relationship, the loan loss provision and cost of risk, an equityallocation, the duration of the credit and its funding cost, and the riskrating of the credit.A secondary benefit to a disciplined approach to loanpricing based on objective factors is that it provides a solid defense fromcharges of unfair or discriminatory pricing in small business lending.• American Banker: Community Banks Must Stay Disciplined as C&I Lending Surges, Claude A. Hanley, Jr. and John R. Barrickman, MAR 5, 20133:00pm ET
  34. 34. Best Practices• A Proactive Approach to Pricing• Pricing used as a tool, in the moment, to Win More Deals• Pricing Used as a tool to build the kind of portfolio that you want to manage• Give lenders better knowledge of different pricing options• Lenders pricing the wayYou want them to• Improve cross-selling of deposits and other products• Understand the value of your existing relationships
  35. 35. Bad Practices• Pricing to the competition• Using spread as an indicator of price• Inconsistent pricing from loan to loan or lender to lender• Not understanding the value of your existing relationships
  36. 36. Not All Margin is Created EqualThe danger of reaching for yield:- You can create immediate margin by going out longer on the yield curvewith lower rated loans.- However, this will cost you over time in terms of increased loan losses, raterisk and capital requirements.
  37. 37. Let’s See the Pricing Dynamic inAction…40
  38. 38. ImpactPricing today determines yourportfolio of tomorrow.Pricing with a Pricing Management System helps:Grow Your Portfolio – Empowering your lenders to winmore of the best deals in your market.Increase Profitability – Knowing what drives theprofitability on each deal and accurately comparing therisk-adjusted profitability of all new Pricing Opportunities.Strengthen Relationships – Empowering your lenders tofocus on the exact needs of each borrower and instantlyhand-crafting options that meets your borrower’s needsand meets or exceeds your profitability targets.Compete with Confidence – Consistently explore pricingalternatives that appropriately incorporate all aspects ofrisk is a powerful competitive weapon.Pricing helps you win and keep your best relationships
  39. 39. In Summary- Pricing is the most important thing you do- Pricing in terms of risk-adjusted ROE targets is critical- Pricing needs to be a discipline
  40. 40. THANKYOUblog.precisionlender.comCraig PomsEVP – Chief Delivery Officercpoms@precisionlender.com980.297.7103Carl RydenCEOcryden@precisionlender.com980.297.7110