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Rising Tide or Shallow Water?

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Mar 16, 2022

Banks and credit unions posted record returns in 2021 but a combination of inflation and reduced fee income may challenge 2022 performance. To change this narrative, financial institutions can look internally to boost revenue and reduce costs.

Rising Tide or Shallow Water? 

In a surprising report released last week by BankRegData, U.S.-based banks earned a record $277 billion in net income in 2021. This was $42 billion more than the previous high, set in 2018. There were several reasons for these watermark returns including lower charge offs due to pandemic stimulus funds, reversing loan loss provisions, and a continued surge in mortgage volume driven by low-interest rates.

The Good News

From 2012 to 2020, US banks averaged $50 billion in annual charge-offs. However, in 2020 during the height of the pandemic, U.S. banks set aside $132 billion in reserves amid fears of an economic meltdown for both commercial and retail customers. In 2021, that number was reduced to $27 billion, the lowest rate in almost 20 years as economic activity in a variety of manufacturing and retail sectors made up for the virtual halt in travel and entertainment activity that transpired in the last three quarters of 2020.

And the good news was not limited to the U.S. as, according to Fitch, net income was up 50% in 2021 over 2020 for the large Canadian banks and 25% over 2019’s pre-pandemic performance. As with the U.S. banks, the positive results were driven by low or negative provisions for credit losses and robust mortgage originations which offset reduced credit card balances and lower margins.


In a recent newsletter, we discussed the pressure Service Charge fees have come under, which make up a significant portion of revenue for banks and credit unions. Banks of all sizes are reducing or eliminating overdraft charges, which will put pressure on revenue moving forward. Rising interest rates will certainly help lending margins but persistent inflation will negatively impact growth rates. The U.S. Federal Reserve Chairman recently noted inflation has persisted longer than expected and there is no sign of retreat in sight with inflation reaching 7.9% in February, the highest level in 40 years. As mortgage rates climb from a pandemic low of 2.25% in 2020 to the current 4.40%, mortgage volume will naturally decrease putting further pressure on bank and credit union earnings. Signs are already showing as the Mortgage Banker Association reported total mortgage applications decreased last week by 13% to the lowest level since December 2019 and applications to refinance dropped 15% from the previous week and were 56% lower than in February 2021.

Identify the Issues

To help offset what might be a challenging year, banks and credit unions should look internally to boost revenue and reduce costs. And although they take work, driving internal efficiencies and addressing revenue leakage can offset revenue challenges and positively impact the bottom line in uncertain markets. 

There are several ways to drive operational efficiencies but knowing where to look is a start. 

  • Take a closer look at ‘below the line’ costs - It's easy to look at expenses in a call report or in aggregate, but do you have a clear line of sight into the primary drivers of these costs? Can you see across multiple product verticals to identify opportunities to simplify processes and eliminate redundancy? An analytically driven process can provide insight to help guide decisions around products, operations, and resource allocation.
  • Processes and Procedures - Many activities haven’t changed in years (perhaps even longer!). But legacy business activities need to be evaluated continuously just as the emergence of digital capabilities now helps drive everyday business decisions. Today, there is an immense amount of data to provide critical insights into business activity and customer behavior to help identify action steps to drive efficiencies.
  • Integrated reporting. Product processing platforms generate reporting, but often only on a periodic basis. This means the data may be 45+ days old, which works well if you want to review past activity but not for time-sensitive actions. Real or near-time reporting can be a critical contributor to making decisions, developing strategies, and improving operational processes.

Taking Action

Focusing on reducing cost and increasing revenue is not new, but many now ask how to best monetize the data. The ability to analyze data sets, develop actionable strategies to reduce cost, and uncover leakage across various portfolios can have a clear and impactful benefit across multiple business lines. 

One example of data analysis driving efficiencies is based on a large credit card issuing client of Profit Insight seeking to reduce the costs of their credit card rewards program while also increasing customer engagement. Reviewing consumer activity in recent months, Profit Insight was able to construct specific scenarios to optimize earning and redemption thresholds and broaden program offers targeted at active users. The results: several million dollars generated in additional annual revenue and savings, allowing the provider to achieve savings objectives and reinvest for future growth.


Like the one above, opportunities can be implemented when businesses take a holistic approach to determine how to best apply analytics to their data. A variety of banking activities and products can yield performance lift including, credit cards, consumer deposits, loans, issuing, acquiring, and operations. Examining portfolios with a critical eye can result in tangible and measurable opportunities to enhance revenue, reduce costs, and improve processes. Most businesses do not have the internal resources or institutional knowledge to really dig in and uncover the benefit. But working with a dedicated and experienced partner like Profit Insight can have a profound positive impact on performance.

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