Bank KPIs: 10 key performance metrics for banks
Colbert White | Data Solutions Group, FIS
February 14, 2022
Leadership starts with access to the right information to make intelligent decisions and drive a data culture. You need efficient access to accurate bank performance metrics and bank KPIs, as well as the right insights to easily interpret them.
The average bank spends an excessive number of hours per month assembling financial performance reports, then updating, distributing, and interpreting data.
Your bank should consider a performance management tool designed to automate this entire process, empowering you to do less burdensome administrative work compiling data and reports, and more time making data-driven decisions that impact your bottom-line success.
Impactful strategic decisions then start with understanding current performance strengths and areas of improvement by tracking the right mix of key performance metrics for banks metrics and bank KPIs:
- Net interest margin (NIM) – A measure of the difference between interest paid and interest received, adjusted for the total amount of interest-generating assets held by the bank.
- Efficiency ratio – The ratio of non-interest expenses divided by revenue. This shows how well the bank's managers control their overhead (or back office) expenses.
- Loans/Deposits Ratio (LDR) – Expressed as a percentage, LDR is used to assess a bank's liquidity by comparing a bank's total loans to its total deposits for the same period. If the ratio is too high, it means that the bank may not have enough liquidity to cover any unforeseen fund requirements.
- Liquidity ratio – The measurement of capacity to pay outstanding liabilities assets on hand. The overall liquidity ratio is calculated by dividing total assets by the difference between its total liabilities and conditional reserves.
- Core deposits/total deposits – Core deposits are insured by the Federal Deposit Insurance Corporation (FDIC) to the amount of up to $250,000. In addition to that advantage, core deposits are generally less vulnerable to changes in short-term interest rates than certificates of deposit (CDs) or money market accounts. The higher the ratio the better for most banking institutions.
- Equity/assets – A way to look at a balance sheet and to condense it down to answer one question – What percentage of assets do investors own?
- Earning asset yield – A popular financial solvency ratio that compares interest income to its earning assets. Yield on earning assets indicates how well assets are performing by looking at how much income they bring in.
- Cost of funds – A reference to the interest rate paid for the funds used in the business. The difference between the cost of funds and the interest rate charged to borrowers is one of the main sources of profit for many banks.
- Return on Average Assets (ROAA) – ROAA is an indicator used to assess the profitability of a firm's assets, and it is most often used by banks and other financial institutions as a means to gauge financial performance.
- Return on average equity – A financial ratio that measures performance based on its average shareholders' equity outstanding.