Client Story: Delivering Strategic Modelling Power to a Global Bank.

This blog post highlights how members of the Revvence team empowered a leading global bank to achieve significant advancements in strategic modelling.

Empowering Bank Leadership: Strategic Modelling for Long-Term Success

Navigating a complex financial landscape requires robust strategic planning expertise underpinned by well-designed data sets. For senior banking leaders, critical decisions at the board level hinge on accurate forecasts and insightful scenario analyses, which is where advanced strategic modelling capabilities come into play.

The Strategic Modelling application our team designed, which we will call "Navigator", allowed bank planners to execute sophisticated models that addressed vital strategic priorities, including:

• Cost Optimisation: Simulate various cost-saving initiatives or restructuring strategies and identify areas for maximum impact.
• Dividend Planning: Model future dividend payouts based on different profitability scenarios, including a Goal-Seek capability.
• Mergers & Acquisitions (M&A) Activity: Evaluate potential acquisitions and assess their impact on the bank's financial health.
• Capital Planning: Ensure adequate capital reserves to meet regulatory requirements and support future growth initiatives.

Project Navigator: Empowering Strategic Decisions with Speed, Flexibility, and Granular Control 

Navigator gives the global bank the agility and control needed for effective strategic planning. The solution's capabilities and customisability enabled the creation of highly complex models encompassing various financial areas, such as:

1. Income
2. Projects
3. Cost Allocations
4. Workforce
5. Non-Workforce
6. Balance Sheet & Cash Flow

The models were developed with critical functionalities needed to bring governance and user adoption to a crucial financial process, including:

• Approval workflows to ensure model integrity and control.
• User-friendly adjustment capabilities at various levels to enable seamless scenario planning.
• What-if analysis with goal-seeking capabilities so leaders could explore different strategic options and identify optimal paths.
• Security and Versioning of plans to ensure complete secrecy and to track the evolution of different model shapes.

Navigator enabled the bank to conduct comprehensive sensitivity analyses using a wide range of market factors to understand potential risks and opportunities. Here are some specific examples:

• Interest Rate Changes: All banking profits are highly sensitive to interest rate fluctuations. Simulating potential interest rate increases or decreases helps assess the impact on profitability, loan demand, and overall bank performance. This allowed leaders to make informed decisions about lending strategies, interest rate hedging, and liquidity management.
• Gross Domestic Product (GDP) Forecast Changes: Economic growth directly impacts loan demand, investment opportunities, and overall banking activity. Analysing various GDP growth scenarios helped the bank plan for potential economic downturns or upturns, optimising capital allocation and risk management strategies.
• Unemployment Rate Fluctuations: Unemployment can significantly impact loan defaults and delinquencies. Analysing potential unemployment rate changes allowed the bank to assess credit risk, adjust loan pricing strategies, and prepare for potential loan losses.

Here are a few more of the wide range of factors or drivers the bank could easily model:

• Stock Market Performance (S&P 500)
• Housing Market Fluctuations (US New Family Homes Sold)
• Market Volatility (VIX Index)
• Global Trade Disruptions

It is worth noting that Navigator wrapped all of this sophisticated functionality in an intuitive user experience that was easy enough for the bank's planning leadership team to use without any involvement of programmers or technology support.

The Benefits of Navigator.

It is challenging to value a bank's ability to turn around plans and models in hours rather than weeks or months, but if you work in strategic planning for a large bank or financial institution, you will know how much value is delivered by being able to review and adjust models in real-time in the board room or a similar setting.

Here are three high-impact benefits of a solution like Navigator for a bank or large financial institution:

1. Enhanced Decision-Making with Greater Confidence: Granular, user-friendly models and what-if analysis capabilities empower leadership to explore various strategic options and their potential impact. This data-driven approach reduces guesswork and leads to more informed, confident decisions.
2. Improved Long-Term Strategic Planning:  The ability to model complex scenarios, including market fluctuations and economic changes, allows banks to plan for the future proactively. This foresight enables them to optimise capital allocation, mitigate risks, and focus on more profitable opportunities.
3. Faster and More Agile Response to Market Shifts:  The flexibility and speed in model creation and updates allow banks to adapt their strategies quickly in response to changing market conditions. This agility can give them a competitive edge in a dynamic financial landscape.

The bottom line is that a solution like Navigator can lead to quantifiable profit optimisation. By simulating different cost-saving initiatives through what-if analysis, leadership can identify areas for maximum impact. This data-driven approach can lead to significant reductions in operational expenses, ultimately boosting profitability.

The Future of Strategic Modelling: The Potential of GenAI. 

While Generative AI (GenAI) is still a rapidly evolving field, it has the potential to play a significant role in strategic modelling for banks. Here are some realistic use cases banks can explore:

1. Enhanced Market Data Analysis and Forecasting:

GenAI can be used to analyse vast amounts of historical market data (financial news, economic indicators, social media sentiment) and identify hidden patterns or relationships that traditional methods might miss. This can lead to more accurate forecasts and a deeper understanding of market dynamics.

GenAI can generate alternative economic scenarios that go beyond simple linear projections. This can give banks a broader perspective on potential risks and opportunities, allowing them to stress test their strategies against a wider range of possibilities.

2. Automating Repetitive Modeling Tasks:

Banks often perform repetitive tasks like creating base case models or updating assumptions based on new data. GenAI could automate these tasks, freeing up valuable time for analysts to focus on higher-level strategic thinking.

GenAI, or more specifically Natural Language Processing, can be used to generate initial drafts of reports based on model outputs, summarising key findings and highlighting potential areas of concern. This can save analysts time and ensure consistency in reporting.

3. Simulating Customer Behaviour and Market Response:

GenAI could be applied to create realistic simulations of customer behaviour under different market conditions. This can help banks assess the potential impact of new products, pricing strategies, or marketing campaigns.

GenAI could be used to generate synthetic datasets that mimic real-world customer behaviour. These datasets can be used to train and test machine learning models used for fraud detection, credit risk assessment, and other critical functions.

Important Considerations:

While the potential of GenAI in strategic modelling for banks is promising, it's important to temper expectations. Some aspects are more realistic than others currently, but it is still worth exploring now, and we recommend our clients follow these principles:

• Explainability and Transparency: Banks must understand the rationale behind GenAI-generated insights. This ensures trust in the recommendations and avoids "black-box" decision-making.
• Data Quality: GenAI models are only as good as the data they are trained on. Banks need to ensure the quality and relevance of their data to generate reliable outputs.
• Integration with Existing Systems: GenAI solutions should integrate with existing bank systems and modelling platforms for seamless adoption.

Overall, GenAI offers exciting possibilities for enhancing strategic modelling in banks. However, a cautious and thoughtful approach is necessary, focusing on explainability, data quality, and integration to maximise the benefits of this powerful technology.

How can we help?

Revvence can help in several valuable ways:

• Review your existing strategic planning approach and compare this against best-in-class.
• Create a proof-of-concept to show you the art of the possible and build your business case.
• The design and delivery of end-to-end strategic modelling solutions like Navigator.