Risk Adjusted Profitability
Risk Adjusted Performance Measures (RAPMs) are results which every bank strategically require to adopt in competitive markets. AFS Risk and performance provides a roadmap of solutions to help bank achieve effective intermediate result with a clear course of action to achieve full risk adjusted profitability measurement models.
Firstly, our Funds Transfer Pricing (FTP) feature enables you to separate the effects of the interest rate risks from the performance of business units to better understand what is impacting your business. Appropriate transfer rates can be allocated to each individual position according to its funding cost or opportunity.
Our FTP Solution allows you to calculate transfer rates on both the transaction level and profit contributions for the different business units. The isolation of these profit contributions makes it possible to establish a comparable and transparent performance measurement system within your financial institution, and effectively assess the profitability of products and organization units. This is the first step towards measuring commercial profitability.
Fully integrated with the ALM module, the FTP framework supports multiple methods and allows industry best practices, like Matched Maturity FTP, and replication based methods for non-maturing accounts, out-of-the-box. Our prior rich experience in the region with several banks in this space also helps us to guide a client on prevalent industry practices and the processes which need to put in place to achieve the results in time.
Secondly, the indirect income and cost allocation are required to reach net profit per transaction. Our profitability module, allows the funds transfer prices results to be adjusted with the non-operating items with allocations being made based on common best-practices, like activity based methods, throughput methods and proportional rule based attributions. As an outcome of this, the Bank is in a position to measure and monitor net profit per chosen dimension like business line, branch, customer group, etc.
Finally, to reach risk adjusted profitability, the net profit results needs to be adjusted for the capital being allocated. This is achieved by either rule based calculations in our solution or integration with our capital computation module, where various measures like expected loss, unexpected loss etc. are calculated and made available to the profitability module. The seamless integration between the modules, allow the Bank to have one view of the risks and the rewards.
Having computed all the required measures for risk adjusted profitability, the framework allows choosing different formulas to compute a desired RAPM like RAROC, RARORAC, RAVA, etc.