Analytics in business has different forms that are applicable to certain areas. The calculation methodology is well developed, and for certain types of miscalculations of the efficiency of the enterprise, there are optimal types of assessment. When it comes to predicting the impact 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 the GAP analysis.
Gap technique principle
The GAP-analysis methodology assumes that there is or is being formed a strategic gap between the expected and actual levels in certain parameters of the enterprise's functioning. As an optimistic indicator, a strategic goal is set, which the management of the organization wants to achieve when doing business. Actual indicators are understood as the actual success of the enterprise in the analyzed direction, field of activity.
It should be noted that this refers to a stable level achieved with the current policy of functioning, and not peak performance, depending onrandom 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 break method on a specific example
Often business analysts get into trouble when they are asked to perform a GAP analysis. The example of using the gap method for lending institutions is very illustrative and easy to understand. Typically, the impact of a rate adjustment on the resulting interest margin, also known as NII (net interest income), is quantified in the short term. As part of the GAP analysis, it can be represented as the difference between "Interest income" and "Interest expenses".
GAP=RSA – RSL, where RSA refers to assets that are sensitive to changes in the market interest rate, and RSL refers to liabilities. GAP is expressed in absolute values - currency units.
RSA includes:
- outgoing interbank credit;
- loans subject to interest rate revisions;
- short-term securities;
- loans provided at "floating" interest.
RSL includes:
- deposit agreements with the possibility of rate revision;
- floating rate securities;
- incoming MBC;
- floating interest deposits.
What does the received GAP value mean
As you can see from the example above, the GAP analysis of the bankinvolves obtaining a quantitative difference between assets and liabilities. The resulting value can be positive, neutral or negative. Please note that a positive score is not a guarantee of success. As part of the GAP analysis, this shows that the bank has more interest-sensitive assets than liabilities.
If the value is greater than 0, then during the growth of interest rates, the company will receive additional income, otherwise, the interest margin will decrease. With a negative GAP, the bank has a larger stock of liabilities than assets, which are highly sensitive to the rate. Accordingly, an increase in the average market indicator leads to a decrease in NPV, and a decrease in the rate will mark an increase in profitability. The case when GAP is equal to zero is purely hypothetical and means that changes in interest rates in the market do not affect NPV.
Functional requirements for an enterprise regulatory system
When analysts fix a positive GAP, the manager should increase the volume of long-term assets with a fixed interest rate. In parallel, the manager is obliged to 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.
When GAP is less than zero, mitigation measures for interest rate volatility in the market should be different. They are easy to determine fromanalogies with actions under 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, prepare to level the destabilizing factor.
The subtleties of applying the gap technique in practice
The choice of bank responses depending on the market situation is not the only case when GAP analysis is applied. There are quite a lot of functional requirements for the system in real projects, however, the level of influence of the interest rate on individual elements of assets and liabilities is not uniform. Some of them react to market changes more strongly, others less.
An important direction is the use of GAP-analysis to assess the results of previous changes and the formation of a single statistical database. In the future, this will make it possible to highlight the most effective levers of influence on the system and increase the quality indicator of the recommendations of the analytical department for the management of the enterprise.
Some tips for managing GAP
Given all of the above, the following key principles of regulation can be identified:
- Supporting a diversified portfolio across sectors, terms and rates. To do this, collect the maximum number of securities and loan agreements that are easy to sell on the market.
- Creation of special plans for operations with each category of liabilities and assets, with differentsituations in a particular business segment.
- Detailed check of the market position. A change in the rate movement trend is not always the beginning of a cyclical change in the market. It could be a small adjustment and a panic reaction would result in a loss of profits and exacerbate existing imbalances.
