Basic information on measuring success in the banking environment or what are the banking KPIs?

It goes without saying that monthly profitability reporting is a very sophisticated and meticulously designed system at most major banks. Sure, most of these are flawless frameworks that reflect the overall success of the banking entity, but not all can show the cause-and-effect relationships between various financial and non-financial factors that contribute to overall performance. For this reason, many bank managers turn to metrics to help them analyze and understand the state of affairs from a variety of non-financial perspectives. This is where Balanced Scorecard and Key Performance Indicators come into play. In this article, we will discuss the benefits of the BSc approach in banking and provide examples of the most common banking KPIs.

Typical banking KPIs

The scorecard approach is very beneficial for the banking industry as it provides a holistic view of the company’s performance from other perspectives that go beyond a purely financial aspect. A typical balanced framework includes four perspectives: finance, customers, internal processes, and learning and growth. These have sub-components that reflect the innermost drivers of the entire organization. These sub-components are also referred to as key performance indicators. So, let’s try to identify the “levers” that most affect the bank’s overall success:

  • ROI (return on investment). These measures provide a snapshot of the business unit’s overall cost effectiveness. These could be Return on Operating Capital, Return on Capital Employed, Return on Equity and many more.
  • Cost-related measures. This includes overhead, cost-to-income, and cost-to-assets ratios.
  • Income-related measures. These metrics reflect indicators that deal with profit. One of the most common is gross profit, interest differential, amount of fee income, and amount of non-interest income.
  • Interest Margin Measures: Interest, profit, operating margins and other indicators.

In addition to these, other different indicators can be used (risk metrics, company asset metrics, etc.). While it’s possible to find ready-made strategy assessment frameworks with relevant KPIs, it’s important to tailor them to the interests of your particular business unit. Below we share some tips for choosing the most effective indicators for your business.

Tips for designing BSCs in the banking industry

Identifying KPIs and building the whole business strategy assessment system is a very responsible task that requires a deep understanding of the innermost processes of the company. Most business owners hire experienced BSC designers to do this work. By hiring experts, you increase your chances of getting a thoroughly designed framework that suits the needs of your particular business unit and minimize the number of common mistakes in developing business evaluation systems.

One of the most common mistakes made when building performance evaluation frameworks is having too many key performance indicators. It’s wise to only identify the most important metrics for your industry, rather than overloading the framework with unnecessary numbers. With too many measures, it is difficult to get a transparent, comprehensible picture of the business situation. In addition, by creating too many KPIs, you distract your employees from their direct tasks.