Analytics in business has various forms that are applicable to individual areas. The calculation methodology is well developed, and for certain types of miscalculations in the efficiency of the enterprise, there are optimal types of assessment. When it comes to predicting the influence of various factors on the profitability of an enterprise and the likelihood of achieving target financial indicators, one of the most common and used is GAP analysis.
The principle of the gap technique
The GAP analysis technique assumes that a strategic gap exists between the estimated and actual levels in individual parameters of the enterprise’s functioning. As an optimistic indicator, a strategic goal is set, which the organization’s management wants to achieve when conducting business. Under the actual indicators refers to the actual success of the enterprise in the analyzed direction, field of activity.
It should be borne in mind that this refers to a stable level achieved with the current functioning policy, and not peak indicators that depend on random factors. Figuratively speaking, the GAP analysis method is an “attack” aimed at eliminating the discrepancy (gap) that exists between the intended and actual results of the enterprise.
The essence of the gap method on a concrete example
Often, business analysts have problems when they are asked to conduct a GAP analysis. An example of using the gap method for credit institutions is very revealing and simple enough to understand. Typically, in the short term, the quantitative impact of rate adjustments on the total interest margin, also called NII (net interest income), is assessed. As part of the GAP analysis, it can be represented as the difference between “Interest income” and “Interest expense”.
GAP = RSA - RSL,
where RSA refers to assets sensitive to changes in the market interest rate, and RSL means liabilities. GAP is expressed in absolute terms - units of currency.
RSA include:
- outgoing interbank loan (interbank loan) ;
- loans, in the conditions of the issuance of which a revision of the interest rate is envisaged;
- short-term securities;
- loans provided at a floating interest rate.
RSLs include:
- deposit agreements with the possibility of rate revision;
- securities with a "floating" rate;
- Incoming MBK
- deposits with a "floating" interest.
What does the resulting GAP value mean
As can be seen from the example above, the GAP analysis of the bank involves obtaining a quantitative difference between assets and liabilities. The final value can be positive, neutral and negative. Please note that a positive indicator is not a guarantee of success. As part of the GAP analysis, this shows that the bank has more sensitive assets to interest rates than liabilities.
If the value is greater than 0, then during the growth of interest rates the company will receive additional income, in the opposite case, the interest margin will decrease. With a negative GAP, the bank has a larger stock of liabilities than assets with a high sensitivity to interest rates. Accordingly, an increase in the average market indicator leads to a decrease in NPV, and a decrease in the rate will result in an increase in profitability. The case when the GAP is equal to zero is purely hypothetical and means that the change in interest rates in the market does not affect the NPD.
Functional requirements for the enterprise regulatory system
When analysts record a positive GAP, the manager must increase the volume of long-term assets with a fixed interest rate. In parallel, the manager must increase the portfolio of short-term liabilities with a high response to market interest. This strategy allows you to get more on profitable contracts and lose less on debt obligations.
When the GAP assumes a value less than zero, measures to mitigate the effects of interest rate volatility in the market should be of a different nature. They can be easily identified by analogy with actions with a positive GAP. When the gap technique shows a value close to zero for the portfolio, it is worth paying closer attention to seasonal changes in the behavior of the client base and, based on the forecast, make preparations for leveling the destabilizing factor.
The subtleties of applying the gap technique in practice
The choice of bank response measures depending on the market situation is not the only case when GAP analysis is used. There are quite a lot of functional requirements for the system in real projects, but the level of influence of the interest rate on individual elements of assets and liabilities is heterogeneous. Some of them react more strongly to market changes, others less.
An important area is the use of GAP analysis to evaluate the results of previous changes and the formation of a single statistical database. In the future, this will highlight the most effective levers of influence on the system and increase the quality indicator of the recommendations of the analytical department for enterprise management.
Some GAP Management Tips
Given all of the above, the following key regulatory principles can be distinguished:
- Support for a diversified portfolio by sector, timing and rate. To do this, collect the maximum number of securities and loan agreements that are easy to implement in the market.
- Creation of special plans for operations with each category of liabilities and assets, in various situations in a particular business segment.
- Detailed check of market position. Not always a change in the trend of betting is the beginning of a cyclical change in the market. This may be a small adjustment, and a panic reaction will lead to loss of profits and exacerbate the existing imbalance.