Banking KPI’s – Metrics Used to Evaluate the Performance of a Banking Entity
Banking KPIs include certain metrics that are quantifiable and specific. They can be categorized into six classifications such as revenue metrics, cost metrics, company asset metrics, investment metrics, interest margin metrics, and risk metrics.
KPI’s or key performance indicators are metrics used to measure an organization’s progress towards achieving its objectives. These metrics can be financial or non-financial in nature. Customer satisfaction has been a common metric used by companies. This can also be used in the financial industry.
If many customers are satisfied with a business, it literally means good progress for the business. However, seeing and knowing that your customers are satisfied with your product or service is not enough. It is also important for a company to have statistical or mathematical information regarding customer satisfaction.
The progress of an organization can be determined not only in the data recorded in the financial statements. Management must also present measures that show the performance and progress of the organization.
Metrics, like key performance indicators, are most commonly used to assess a company’s performance in different areas and activities. The metrics mentioned above can be divided into several measures.
In the revenue metrics category, a business can measure its revenue performance through the following measures: gross profit, non-interest income level, fee income level, and interest margin.
Gross profit is a common component on a business income and expense statement. It is calculated by subtracting cost of sales from sales.
The level of fee income for service-oriented businesses can be obtained by dividing operating income by fee income. On the other hand, non-financial income divided by operating results results in the level of non-financial income.
The calculation of the interest margin involves a complex equation. To derive the interest differential amount, interest income is divided by interest-earning sales. The result of the first equation follows from the relationship between interest expense and interest-bearing liabilities.
Meanwhile, the measurement of business operation costs can be done using different ratios such as: cost-to-asset ratios, overhead cost ratio, and cost of revenue. Cost of asset ratios are obtained by dividing average assets over the period by operating expenses. The ratio of overhead costs to sales produces an overhead cost ratio, while operating expenses divided by operating income results in a cost-to-income ratio.
Return on capital employed, return on operating capital, and return on equity are investment metrics. These metrics included taxes, principal, earnings, and interest.
Meanwhile, interest margin metrics are based on profit margin. To get the profit margin, you need to divide the amount of sales by the amount of profit. Operating margin and interest margin are other metrics in the interest margin category. Operating profit divided by sales yields operating margin, while the difference of interest income and interest expense divided by average interest earnings on assets is the equation for deriving interest margin.
Metrics to measure the return on company assets include nonperforming assets, return on average assets, and reserve requirements. Risk metrics, on the other hand, include the capital adequacy ratio and value-at-risk measures.
Banking KPIs can be similar across multiple banks. These metrics have quantifiable attributes. For a bank entity to measure quantifiable and abstract metrics, a balanced scorecard can be used.