Assumptions Validation is the process of testing your configuration of PrecisionLender before the system is rolled out to your entire organization.
- Gather recently closed loans, deposits and fee accounts to test the settings
- Build the data necessary for setting the initial ROE targets.
- Verify that the product list is complete and that the default settings for each individual product are appropriate.
- Test a sufficient range of loan structures to validate the credit, overhead, funding and capital assumptions.
- Make sure:
- They are directionally consistent.
- The profitability results are properly impacted by the different collateral types, risk grades and guarantees.
- Build a large enough sample set of recent accounts so that ROE targets can be determined for each product type and will be near market level.
- The general rule for Assumptions Validation, is that the more opportunities that can be gathered and used for testing, the more comprehensive testing will be, and the more appropriate initial targets will be.
- At a minimum, we recommend the organization pull five opportunities per product type.
Types of accounts we recommend for testing purposes:
- Opportunities recent enough to reflect current market conditions.
- While this definition will vary depending on the specific market and interest rate volatility, opportunities booked within the last quarter are usually sufficient.
- If possible, gather recent loans that were lost to competition.
- These can be good indicators of the current competitive pricing dynamic.
- Opportunities reflecting a representative mix of quality and structure.
- We recommend focusing on deals that are representative of deals the bank does every day.
- Avoid loans that are unusual or outliers:
- Unusually large deals
- Odd or atypical loan structures
- Absolute best and absolute worst credit
How will we use this information to set your ROE targets?
- During the onsite express onboarding workshop, we will work with your lending experts, system admins and senior loan officers, to enter these deals into PrecisionLender.
- As multiple examples of the same product are entered, you will notice that the ROEs begin to coalesce around specific returns. This will help us identify what it takes to win in your market.
- Once we determine those competitive points for each product, we will discuss the bank’s appetite for each product type.
- The more aggressive your growth goals are, the lower the target ROE will be set in relation to the market.
- The less aggressive your growth goals, the higher the target ROE will be set in relation to the market.