Basic Information on Performance Measurement in Banking Sphere or What Are the Banking KPIs?
It goes without saying that monthly profitability reporting at most large banks is a very sophisticated, and meticulously developed system. Sure, most of these are flawless frameworks that reflect the overall success of the bank unit, yet not all of them can point out the cause-and-effect relations between different financial and non-financial factors contributing to the overall performance. For this reason, many bank executives opt for metrics that will assist them in analyzing and understanding the state of affairs from different, non-financial perspectives. This is where Balanced Scorecard and Key Performance Indicators come into play. In this article we are going to dwell upon the advantages of the BSc approach in banking sphere and give examples of the most common banking KPIs.
Typical Banking KPIs
The Scorecard approach is very beneficial for banking industry, since it gives a holistic view of the company’s performance from other perspectives, beyond a purely financial aspect. A typical balanced framework includes four perspectives: Financial, Customer, Internal Processes, and Learning and Growth. These have subcomponents which reflect the innermost drivers of the whole enterprise. These subcomponents are also known as Key Performance Indicators. So, let’s try to identify the ‘levers’ that impacts the overall success of the bank the most:
ROI (Return on Investment). These measures provide a snapshot of overall cost-efficiency of the business entity. These could be Return on Operating Capital, Return on Capital Employed, Return on Equity, and may more.
Cost-related measures. These include Overheads, Cost to Income, and Cost to Assets Ratios.
Income-related measures. These metrics reflect indicators dealing with profit. One of the most common are Gross Profit, Interest Rate Differential, Fee Income Level and Non-Interest Income Level.
Interest Margin Measures: Interest, Profit, Operating Margins and other indicators.
In addition to these, other different indicators can be used (risk metrics, company assets metrics, etc.). Although it is possible to find ready-made strategy evaluation frameworks with relevant KPIs, it is essential to adjust them according to your particular business entity interests. Below we are going to give some tips on selecting the most effective indicators for your business.
Tips on Designing BSCs in Banking Industry
Identifying KPIs and building the entire business strategy evaluation system is a very responsible task that requires profound understanding of the innermost processes of the enterprise. Most business owners hire experienced BSC designer to have this job done. By hiring experts you increase your chances to get a profoundly designed framework that will meet your particular business unit’s needs, as well as minimize the amount of the most common mistakes in business evaluation system designing.
One of the most common mistakes in creating performance evaluating frameworks is too much key performance indicators. It is advisable to identify only the most essential metrics for your industry, instead of cluttering the framework with unnecessary figures. With too many measures it is difficult to get a transparent, comprehensible picture of the business state of affairs. Moreover, by creating too much KPIs you will distract your employees from their direct duties.