Introduction

Despite being in a data-rich and highly regulated industry, most banks lack the tools and discipline to accurately measure profitability at the product, customer, or relationship level. In fact, studies show that fewer than 5% of banks implement profitability analytics properly and even fewer tie those insights to daily decision-making across pricing, capital planning, and resource allocation.

This gap leaves institutions vulnerable. Without a rigorous understanding of where value is created and where it is destroyed, banks often misprice loans and deposits, over-serve unprofitable customers, under-allocate capital to high-return opportunities, and chase volume instead of sustainable returns. The result is a slow erosion of net interest margin, capital adequacy, and long-term competitiveness.

Many executives believe their institution is "too small," "too busy," or "doing fine without it." But these beliefs often mask a lack of visibility into where the bank is truly making money. Institutions that rely solely on averages, departmental budgets, or intuition are increasingly at risk in today's margin-compressed environment.

Profitability analytics fills this gap. It brings transparency to financial performance at the level where decisions are actually made, by product managers, lenders, operations, and frontline staff. And when integrated with frameworks like Funds Transfer Pricing (FTP) and Time-Driven Activity-Based Costing (TDABC), it equips leadership to align strategy, pricing, and execution with the bank's most important financial mandate: earning a sustainable Risk-Adjusted Return on Capital (RAROC).

This paper explains why profitability analytics is no longer a "nice to have," but a strategic requirement, and how modern frameworks make it accessible, scalable, and transformational for banks of any size.

Strategic Value of Profitability Analytics

A. Clarifying the True Drivers of Value

Most general ledger and budgeting systems report profitability by department or division. But this tells you very little about which products, customers, or activities are actually creating value. Profitability analytics cuts through that noise by tracing revenue, cost, risk, and capital consumption to the unit level—so leadership can see exactly which parts of the bank are earning their keep.

B. From Guesswork to Precision in Pricing

Using average cost of funds or rule-of-thumb overhead factors in pricing is no longer sufficient. Profitability analytics, through robust Funds Transfer Pricing (FTP), ensures that every loan and deposit reflects its true marginal cost of funding and liquidity. When paired with Time-Driven Activity-Based Costing (TDABC), banks can also account for the actual cost to originate and service accounts, improving both price setting and negotiation strategy.

C. Enabling Strategy Execution

Strategic planning without profitability analytics is blindfolded execution. It’s not enough to say "grow business lending" or "improve digital adoption" without knowing which segments, channels, or behaviors actually contribute to ROA. By embedding profitability metrics into day-to-day decisions, banks can ensure that every campaign, product rollout, or policy change is aligned with financial sustainability.

Critical Capabilities Enabled by Profitability Analytics

1. Sustainable ROA and Capital Planning

A bank's capital base must be supported by earnings that are not just positive but risk-adjusted and sustainable. Profitability analytics gives CFOs and ALCO committees the insight to:

• • • • • • • Target an ROA that aligns with capital adequacy goals

            • Allocate capital where it generates the highest returns

            • Adjust strategy based on changing funding or risk profiles

2. Transparent Loan and Deposit Pricing

FTP enables pricing that reflects term structure, optionality, and liquidity costs, while TDABC attributes operational costs based on real activity, not allocations. Together, they:

• • • • • • • Inform more accurate product margins

            • Prevent mispricing that erodes earnings

            • Support consistent pricing policies across teams and geographies

3. Relationship-Level Economics

It’s not enough to ask whether a borrower is "in good standing." The real question is: Does this relationship create or destroy value over time? Profitability analytics enables relationship managers and retail leaders to:

• • • • • • • Measure the total contribution of a customer or segment

            • Identify cross-sell opportunities that move relationships into positive territory

            • Develop pricing or service models that reflect actual profitability

4. Operational Efficiency and Cost Transparency

When costs are understood at the unit and activity level, improvement efforts can be targeted where they matter. This includes:

• • • • • • • Channel migration strategies based on cost to serve

            • Staffing models optimized for high-margin services

            • Outsourcing decisions tied to activity-based costs

5. Governance, Compliance, and Stakeholder Confidence

Regulators, boards, and investors increasingly demand defensible metrics for profitability and risk. A modern profitability analytics framework supports:

• • • • • • • Stress testing and scenario planning with real cost and funding data

            • Risk-adjusted performance measurement at multiple levels

            • Transparent reporting tied to strategic goals

Execution Framework: From Insight to Action

Kohl Analytics Group recommends a Strategic Management Framework (SMF) that transforms profitability insights into operational execution. It includes:

• • • • • • • Strategic Pricing Framework (SPF): Aligns product and relationship pricing with funding cost, operational cost, and required return on capital.

            • Multidimensional Value Analysis (MVA): Tracks profitability across products, customers, branches, credit tiers, channels, and time.

            • Performance Feedback Loops: Allows teams to see how decisions impact profitability metrics, encouraging continuous refinement and alignment.

By embedding these components into planning, forecasting, and daily decisions, banks create a living system that adapts with the institution.

Conclusion

Banks can no longer afford to manage by averages, hunches, or departmental silos. Margin compression, rising capital costs, and competitive pressure demand a more intelligent approach to managing financial performance.

Profitability analytics provides the missing link. It allows banks to see where they make money, where they lose it, and how to shift the mix in favor of sustainable value creation. With frameworks like FTP and TDABC, and execution tools like SMF, banks can turn insight into action and action into advantage.

It’s time to make profitability analytics core infrastructure, not a side project.