Banking KPIs include certain metrics that are quantifiable and specific. They can be classified into six classifications, such as revenue metrics, cost metrics, company asset metrics, investment metrics, interest margin metrics, and risk metrics.
KPIs or key performance indicators are metrics that are used to measure the progress of an organization 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 a metric used in the financial industry.
If many customers are satisfied with a company, it literally means good progress for the company. 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 with 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 evaluate a company’s performance in different areas and activities. The metrics mentioned above can be divided into several measures.
In the category of income metrics, a company can measure its income performance through the following measures: gross profit, level of income without interest, level of income from commissions and interest margin.
Gross profit is a common component on a business income and expense statement. It is calculated by deducting cost of sales from sales.
The level of commission income for service-oriented companies can be derived by dividing operating income by commission income. On the other hand, non-financial income divided by the results of operating income at the level of non-financial income.
Calculating the interest margin involves a complex equation. To derive the amount of the interest margin, the interest income is divided by the interest-bearing sales. The result of the first equation is derived 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 ratio, overall cost ratio, and cost of income. The cost of the asset ratios is obtained by dividing the average assets during the period by the operating expenses. The general cost and sales ratio yields a general cost ratio, while operating expenses divided by the operating income results to the cost-to-income ratio.
Return on capital employed, return on operating capital, and return on equity are investment metrics. These metrics involved taxes, principal, earnings, and interest.
Meanwhile, the interest margin metrics are based on the profit margin. To get the profit margin, you need to divide the sales amount by the profit amount. Operating margin and interest margin are other metrics in the interest margin category. Operating profit divided by sales produces an operating margin, while the difference of interest income and interest expense divided by the average interest profit on assets is the equation for deriving the interest margin.
The metrics for measuring the performance of the company’s assets include non-earning assets, average return on assets, and reserve requirements. Risk metrics, on the other hand, include the capital adequacy ratio and value-at-risk measurements.
Banking KPIs can be similar across multiple banks. These metrics have quantifiable attributes. For a bank to measure quantifiable and abstract metrics, a balanced scorecard can be used.