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Forecasts for Individual Earnings Components

“Planning means that error replaces chance” – but even financial companies cannot avoid a regular planning and forecasting process.

In contrast with the “conventional industry,” however, the products in the finance industry offer a number of special features that are derived from the products themselves on the one hand and also result from the special accounting rules according to IFRS on the other. The latter is, of course, only relevant if a forecast of IFRS values is desired or required. In most cases, however, it should be the case that both management internally and stakeholders externally have an interest in the expected future earnings and that a different forecast basis from the actual reporting basis would then be difficult to communicate.

For the usually most important single metric, net interest income, the challenge begins with the question of which components are to be included – is current income from trading to be reported in net interest income or in net trading income? On the other hand, a general forecast of net interest income does not appear too complex due to the mostly long-term structure of loans. However, it should be noted here that net interest income is also influenced by maturity transformation components and that amortization of hedge adjustments, transfers of pull-to-par effects and the accounting category may also play a role in the reporting. Particularly with regard to new business, appropriate assumptions must be made both for the interest rate level of the lending business and for future funding.

A stronger link to general market expectations may be necessary for other types of results. Net commission income in the securities business in particular is generally highly dependent on the performance of capital markets. Other components, such as payment transactions business, are heavily revolving and most likely linked to developments in the real economy.

FAS AG Support with Forecasts for Individual Earnings Components

FAS AG supports credit institutions, insurance companies and financial service providers in the design and creation of plans and forecast processes at the level of individual earnings components at the product level and at the level of the entire company. FAS AG experts are available for the design of methodical approaches as well as for the design and implementation of processes for the regular execution of plans and forecasts. In addition, we will support you in the selection of tools and data sources for determining them.

If you are interested or have any questions, please contact us.

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 Andreas Huthmann Managing Partner