Key Performance Indicators

Question 1

What does the gross margin income on deal level depend on?

Answer 1

• Percentage margin that is added to the providers cost of funds
• The size term, deposit and repayment profile of the deal

Question 2

What are the various results of changing deposit and term?

Answer 2

Higher deposit reduces gross margin income due to outstanding balance being less through the term
Increase term of the deal means higher gross margin because outstanding balance reduces slower
Longer term adversely affects the providers risk position because of outstanding balance being higher throughout the term

Question 3

What are the results for repayment profiles?

Answer 3

Quarterly in arrears will result in higher capital balances and therefore higher gross margin
Ballon payments = higher capital balance outstanding

Question 4

What is the importance of return on capital for all sections?

Answer 4

Direct - return on capital more important than profit due to cost of funds considered when allocating, capital for a product
Captive - may be a loss leader if the unit sales more important
Profit for independents may be to shareholders

Question 5

What are the Key Performance Indicators?

Answer 5

• New Business volume : gross value of assets financed (ex VAT)
• Portfolio (or book) size - net value of all types of current finance agreement at a point in time
• Gross margin - Profit margin added to providers cost of funds for each deal. The weighted average gross margin achieved across the portfolio
• Gross yield - at a customer level it is the providers cost of funds plus the gross margin
  at portfolio level it is the average gross yield on all current deals in the portfolio

Question 6

What are the other KPIs?

Answer 6

• Bad debt charge - also known as cost of credit percentage ratio of bad debt write offs to portfolio size
• Net interest income - equivalent to gross profit for a manufacturer minus financing costs - lending income minus interest payable on borrowing
  Higher NII desirable but often includes risky portfolio and high bad debt
• Cost income ratio: operating costs divided by total income operating efficiency
  Issue with cost income ratio is costs are inflated by depreciation of operating lease assets, included in costs
• Return on assets - profit before tax divided by total assets x 100 - how effective assets are being used
  Return on equity - profit before tax divided by shareholders x 100 - how efficiently shareholders funds are being used
• Note that a bank pwned asset finance provider needs to compare well to other lending products in order to maintain its status as a core product

Question 7

What are the Portfolio analysis?

Answer 7

Individual customer exposure (including those of subsidiaries)
Origination source - broker vendor
Asset type
Customer setor
Residual value and when will the residual value risk exposure be realised

Question 8

What are the key decision based on the above results?

Answer 8

Should the portfolio be sold
Should certain market sectors be low priority or pulled out from
Should certain market sectors be priority and moved into
Should portfolio be increased by acquiring competitors portfolio