Active risk and return management has never been more critical for financial institutions. Banking planning can no longer be limited to an annual exercise disconnected from operational and regulatory realities. With the emergence of standards such as expected credit losses and mandatory stress tests, banks must rethink their forecasting processes. When properly structured, these constraints become an opportunity: transforming planning into a true lever for improving the reliability of profit projections and overall performance.
Linking planning, profitability and risk: a key challenge for banks
To remain competitive in a volatile economic and regulatory environment, banks must evolve their margin planning approaches to improve forecast accuracy and reduce risk exposure.
By developing more granular profit forecasts that are better connected to future decisions, financial institutions can better anticipate the impact of strategic choices on profitability and financial resilience.
The historical separation between performance and risk management
Banks represent one of the most advanced illustrations of the interaction between risk and return. Over time, however, risk monitoring mechanisms-such as asset and liability management (ALM) and stress testing-have diverged from the planning tools used to project future performance.
While financial planning focuses on profitability and accountability of business units, ALM and stress tests adopt a global, risk-centered perspective. These two approaches often struggle to converge within a unified framework.
Forecasting the entire balance sheet to strengthen margin reliability
Unlike most industries, banking planning cannot start solely from the income statement. A bank's profitability largely stems from its balance sheet, particularly loans and deposits.
Balance sheet planning involves projecting assets and liabilities while integrating their impact on the overall risk position. A margin management solution must consolidate all balance sheet components-loans, deposits, liquidity, provisions and required capital-into a coherent and balanced view.
Leveraging known cash flows and contractual data
Banks already possess a significant amount of information on future cash flows derived from the contractual characteristics of lending and deposit instruments.
By leveraging these existing data points rather than relying on average or simplified assumptions, it becomes possible to build margin forecasts that are more accurate and more representative of operational reality.
Integrating customer behavior into forecasts
Customer behavior assumptions-such as prepayments, defaults, credit line utilization or seasonality-complement contractual information to deliver a realistic forward-looking view.
Linking these behaviors to economic variables facilitates scenario analysis and stress testing, thereby strengthening forecast robustness.
Incorporating funds transfer pricing (FTP)
Funds transfer pricing is essential for analyzing risk-adjusted returns. It enables interest rate and liquidity risks to be transferred to a centralized treasury function.
This approach shields business units from market fluctuations and allows them to focus on the margins they truly control, simplifying planning and improving forecast ownership.
Aligning expenses with true performance drivers
Expense budgets based on arbitrary percentages increase the risk of forecasting errors. Banks must link costs to projected activity volumes and portfolio evolution.
By clearly identifying cost drivers, budgets become a performance management tool aligned with expected outcomes rather than a mere negotiation exercise.
Adapting to macroeconomic variables and interest rates
Banks are particularly sensitive to changes in interest rates, inflation and economic activity. These factors directly influence portfolio growth, asset valuation and margins.
Planning tools capable of centralizing and automatically applying macroeconomic assumptions facilitate simulations and enhance resilience to economic shocks.
Distinguishing the status quo from strategic initiatives
Strategic initiatives approved by boards of directors must be analyzed separately from the bank's ongoing operations.
By clearly distinguishing the status quo from strategic projects, institutions avoid the proliferation of parallel spreadsheets and improve forecast clarity and reliability.
Establishing a controlled and auditable forecasting process
In a reinforced regulatory context, planning and forecasting processes must meet the same standards of control, transparency and auditability as traditional financial systems.
Forecasting tools are no longer simple internal management instruments, but critical components of banks compliance and governance frameworks.
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Last updated on Jan 22, 2026