1) Shareholder value is a key measure for evaluating banks and assumes greater importance in today's dynamic economic environment. It provides a clear quantification of an organization's value within current financial reporting standards. 2) Banking CFOs need efficient enterprise performance management (EPM) systems to gain a holistic understanding of financial valuations, profitability, cash flows, and make future projections. This allows them to actively participate in strategic planning and forecasting to consistently create shareholder value. 3) An effective EPM system requires access to accurate enterprise-wide data on financial instruments, macroeconomic indicators, and risk factors. It also needs quantitative modeling capabilities and controls to simulate scenarios and optimize financial projections and regulatory capital

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White Paper
Enterprise Performance Management – Redefining Shareholder Value for
Banks
Shareholder value isakeyparameter withregardto thevaluation of anenterprise; itassumes
greater prominencein today's dynamic economic environment. This measure provides a clear,
unambiguousquantification ofanorganization's value within theframework of current financial
reporting standards and banking regulations. In spite of being criticized for having a narrow focus
on financialgoals, it helps the management gain an aggregated view of the value of a banking
enterprise, and understand it in all its financial facets – profitability, capital,solvencyorliquidity,
andrisks.
As markets becomecompetitive and customers grow demanding, Chief Financial Officers (CFOs) across the
banking world need to proactively participate in developing the organization's strategic roadmap,review business
performance,aswellasendorse its annual financial results. A CFO's responsibilities includedecision-making
related to the pricing of financialproducts, measurementandmanagementofliquidity, solvency, interest rate risks,
fundtransfer pricing,andcreditloss provisioning, among others.
Thispaperexamines the planning anddecision support systems that banking CFOsrequire to improve business
output, thereby enhancingshareholdervalue.
Introduction
Toavoid a financialdebacle, lending firms should adopt a conservative approach in sanctioning credit, and
dissuade customers from assuming highly leveraged positions with respect to their funding arrangements.
However, over the last couple of decades, to make the most of a booming economy, banks had drifted from this
guiding principle to ensure profitability. Competitive pressures therefore resulted in highly leveraged, low equity
banking entities. Under the recessionary pressures of the recent past, such banks tried to de-leverage from
tenuous positions by shedding assets or using methods such as securitization. Financialentities, globally, had
been drawn into a web of transactions, for example, of mortgage-based securities and a host of related
financial instruments. As regulations becamestricter, lending institutions turned to short-term funding sources,
rather than conventional deposits, for these transactions. Debt default and liquidity concerns resulted in panic
sales all across, which further led to a downward spiral of asset prices, sinking profits, and the general erosion
of equity valuations, across the globe.
Post the financial crisis, banks put in conscious efforts to move back toward better capitalization, in part, also
due to stiffer regulatory demands. However, they continue to struggle with concerns around low profitability and
their inability to sustain capital buffer to extend credit– a criticalneed for many growth-starved economies. This
has also resulted in a shift to new business models for improved profitability and sustainable operations. The
focus now is to minimize leveraging of equity and adopt strategies that promote investments with healthier
RoIs, while increasing shareholder value. As a result, the role of the banking CFO has expanded to include the

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responsibility for making recommendations for organizational strategy and evaluating post-execution
performance.
In light of these developments, banks need to have strong mechanisms for enterprise performance
management (EPM). They need efficient EPM systems that provide holistic as well as granular views of the
enterprise. CFOs can use such systems to gain a deeper understanding of the bank’s current and future
financial valuations, profitability, and cash flows (both on and off balance sheet), for better transparency and
improved capability to make future projections. By enabling CFOs to actively participate in the strategic
planning and forecasting process, and allowing them to set target performance metrics and recommend course
corrections as and when required, these systems help in ensuring the bank consistently creates shareholder
value.
How ShareholderValue is measured
As per financial literature, entity valuations are done on the basis of financial reporting standards and
frameworks, and the results are presented in financialstatements. However, market volatilities over the last
decade have changed the perception of value, engineered new business models, and developed complex
financial instruments for risk management. These changes have in turn triggered a need for a reappraisal of
standards and regulations to classify and measure the value of an enterprise. Themere valuation of an
enterprise’s assets and liabilities at a given point of time does not quite suffice to capture the value of a going
concern.
Industry analysts use several methods to measure and forecast shareholder value based on conventional
market multiples. These include PE ratio, MBV approach, and other evolutionary models around cash flow
discounting such as the dividend growth model. Thebanking industry is susceptible to credit cycles and loan
defaults, therefore market anticipations based on ratios (like PE and MBV) have limitations and can lead to
distortions in valuation forecasts. Shareholder Value Added is another measure calculatedas the excess of an
enterprise’s Return on Equity (RoE) over the shareholders expected Rate of Return (RoR); it reflects the
company's efficiency in utilizing investor money.
A bank’s valuation is best gauged not only with respect to present intrinsic valuations on its books, but also its
future cash flows expected on a ‘going concern’ principle. Thesefuture cash flows arise from on-balance sheet
business (net interest income)and off-balance sheet business (fee-based incomes like advisory work,
commissions, asset management, brokerage, and so on).
Operating in a business environment that is often on the edge, and surviving a regulatory framework that keeps
getting stringent in response, banking organizations are compelledto make continual assessments of what
creates value and what erodes it. Technologycan help make these dynamic evaluations and simulate their
impact on shareholder value, using granular data, economic,business, and decision variables, and by
embedding domain insights into related IT applications.
Shareholder value reflects an organization's efficiency in using investor money, responsibly and profitably.
Continual assessment of how you fare on this parameter is therefore a business imperative.

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What Impacts ShareholderValue of Banks
TheC-suite's concernsaround a bank's valuation need to be understood in the context of many internal and
external factors. External factors includethe economic environment in which the bank operates financial
positions of its peers, their influence on re-pricing products and market share. Internal factors includethe
current state of its balance sheet, profitability of its lines of business, risks, and the constraints or capacities of
regulatory capital.
Banks need to strategize for new business models. Thiscan imply a combinationof low profitability with new
regulatory requirements (for capital adequacy), portfolio sell-offs, re-pricing of existing business lines, non-core
business divestments, and reductions in operational costs. In some cases, banks may move away from
conventional credit to more fee-based services to improve returns. Change in business models have their
implications on shareholder value in the medium to long term.
Ever since the crisis, many major European and North American banks have undertaken the 'repair' of their
balance sheets by de-risking and de-leveraging their positions. Balance sheets strengthened for regulatory
capital however, imply carrying higher costs (a higher equity spread on bank loans), as well as lower return on
equity (ROE) and return on assets (RoA), compared to historical values. Lower profitability is reflective of
cautious, conservative, low risk-return activities and a carryover of past burdens in terms of Non-Performing
Assets (NPAs) in a sluggish economy as well as high litigation costs.
BASEL III requirements for LCR (Liquidity Coverage Ratio) and Net Stable Funding Requirements (NSFR) will
further nudge banks toward liquid (low return) assets. Change in the regulatory environment has influenced this
balance sheet repair exercise, thereby impactingvaluations.
Profitability or earnings are influenced by investment decisions that may lower Net Interest Margins (NIMs).
Decisions on re-pricing and timing of deposits and loans also influences interest rates that in turn impactprofits.
Other factors includeoperating efficiency of banks (impacts technology decisions and business models),
inflation (impacts salary escalations), and restructuring exercises (which may imply higher cost-to-income ratio).
On the other hand, improved asset quality and capital ratios encourage banks to increase loan clientele and
promote growth. Restructuring of operations can improve profitability and shareholder value in the long run.
Banks find themselves in varying circumstancesof recovery and capital strength proportions, amid business
restructuring exercises for restoration of capital or profitability, as well as hangovers of past debt and litigations.
Further, current and future economic factors may influence eachother in evolving country-specific economic
phases. Banking CFOs therefore face multiple challenges, constraints, and factors that influence each other,
which in turn might result in an upward or downward spiral in shareholder value.

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Enterprise Performance Managementis the Answer
Once established on the basis of financial valuations and cash flows, the enterprise shareholder value canbe
understood in terms of key financial metrics. These includeprofitability, operating efficiency, leverage, liquidity,
and capital adequacy. A banking enterprise therefore requires a strong EPM system to accurately evaluate
itself and its entities— the group, parent, subsidiaries, business lines, value centers, and branches.
Thisrequires EPM systems to have planning, forecasting, budgeting, and performance review capabilities that
align with the bank's objectives for enhancing shareholder value. The EPM system should also build in the
flexibility for the bank to recast its plans and forecasts if necessary, considering the business or economic
cycle it finds itself in.
Designing an Effective EPM System
Any enterprise system for evaluation, tabulation, analysis, and suggestion, is only as good as the data and
process definitions fed into it. Hence, the primary requisite of a good EPM system for banking institutions is the
access to accurate, current enterprise data. Thiswill ensure the accuracyof projections on profitability, cash
flows, and more. Key considerations while designing an EPM system for banks are:
Enterprise data: Granular enterprise data on deposits, loans, investments, and other financial instruments could
be related to current balances and contractual terms with regard to interest rates and maturity patterns, cash
flows expected from each instrument, and more. These data points are used to calculatetheir summarized
impact at an enterprise level for upcomingforecast periods.
Macroeconomic indicators: Geography-specific macroeconomic indicators should be defined to assess the
impact on projected financials, whichshould further be modeled in accordingly. These macro-economic
indicators include:
 Interest rate yield curves applicable to forecasted periods
 Impact of inflation on the yield curve and associated effects on re-pricing decisions and growth rate
 Influence of indicators like GDP on deposit, loan growth, and investment sentiments
 Theconjoint set of factors that indicate the stage of the credit cycle that the enterprise will be in a given
period, and related impact, for instance, on lending activities and non-performance allowances for the
period
Intrinsic factors: Intrinsic factors that influence banking processes should be modeled into the EPM system.
These are:
 Factors that influence prepayments of loans (like age and tenure) or make customers switch loans (for
instance a change from floating to fixed rates)

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 Decisions that influence deposits (for instance, their growth, shifts from one type to another) n Transfer
pricing decisions that influence deposits and loans (consumer, corporate, inter-bank) n Circumstances
that influence re-pricing decisions
Risk factors and key decision variables: TheEPM system must provide a mechanism to identify risk factors and
key decision variables to assess the impact on financial projections. The mechanism should help banks:
 Identify and aggregate risks, categorized by their nature (for instance, credit, market, liquidity,
operational, strategic, and regulatory risks)
 Understand the impact of different decision variables (for instance, re-pricing, transfer pricing, strategic
growth factors, and more)
 Factor in the impactof strategic initiatives that influence market share, revenue, operating costs, and
so on
 Identify and model in specific litigation costs based on past behavior or future probability
 Model risk impacts on financials using statistical distributions and simulation techniques
Controls and constraints: The EPM system should provide specific controls and constraints within which all
projections can be made. Theseinclude:
 Factors that constrain or control financial projections (for example, asset liability management (ALM)
approaches or guidelines, controlling or limiting parameters indicated in a management plan, loan-
deposit ratio, liquidity coverage, fund stability, and other bounding factors)
 Ability to predict and set resource requirements (for instance, resources and funds needed to meet the
bank's growth requirements in line with its strategic plans)
Quantitative methods: The system should have simulative features, scenario building capabilities, and
optimization techniques. These include:
 Theability to simulate and stress test projected financial statements for positions, profitability, cash
flows, and more
 Capital optimization models to reconcileregulatory capital with economic capital and provide metrics
for efficient and optimized capital management
 Dashboards to view the impactof changing variables by way of 'what-if' analyses or simulation of
performance indicators for all aspects of profitability, efficiency, credit, liquidity, and solvency (like
ROE, Risk-adjusted Return On Capital (RAROC), NIM, (NIM Customer Spread (CS)%), CIR (Cost
Income Ratio),NSFR, LCR, and others)

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Data visibility: Holistic, dimensional, pivotal, and granular views of projections and actual results. These include:
 Financialsand relevant performance indicators classified by organizational dimensions: products,
channels, business lines, geographies, large customers, and more
 A breakdown of the ROE and RAROC to their elemental components at the enterprise as well as the
LoB level, after appropriate allocation of capital and profitability
 Usage of RAROC as a pointer to hurdle rates for channels, LoBs, products, or important customer
relationships
 Compatibility of budgets and forecasts with financial statements with regard to accounting policiesand
standards, and the ability to track all line items of financial statements, whether from a group
consolidated level or subsidiary level, to requisite detail in books
 Shareholder value and its breakdown to all the parameters that influence it
Conclusion
Shareholder value is a pragmatic and holistic measure to assess a bank's financial health. Performance
management systems for banking institutions need to go beyond commonmarket multiples and provide deeper
insights into future profitability and cash flows, to understand and predict shareholder value. EPM systems need
to have requisite analytics capabilities to provide ample granularity regarding this vital parameter in terms of
banking metrics like profitability, efficiency, credit, leverage, liquidity, and capital adequacy.
As a bank's shareholder value may grow or erode depending on its macro-economic environment, other than its
own business model and capital arrangements, the forecasting mechanism must tie into, and be relevant to the
economic cycle or phase in which the organization operates. The logic and algorithms embedded in systems
should also necessarily provide the means to simulate stress and optimize financial forecasts while making
regulatory capital requirements economicallyviable.
A convergence of digital solutions, analytics, domain insights, knowledge of standards and regulations, and
quantitative methods is needed to calibrate and drive shareholder value across the enterprise.