Customers who are comfortable with technology are driving the growth of online banking. Research from the United Kingdom’s Juniper estimates that by 2026, digital banking will be used by more than 53% of the world’s population. Banks may save money and time by providing a streamlined digital banking experience for customers, and this, in turn, can lead to new forms of revenue and monetization.
However, to gauge the efficacy of the banks’ digital transformation, it is essential to have key performance indicators (KPIs). This blog delves into the 25 most important bank KPIs that managers like you use to evaluate performance.
Why Banks Need Banking KPIs
Banks can track their progress toward measurable targets using key performance indicators. Strategic goals should be implemented when a bank or credit union establishes them. These banking KPIs reveal how far along the path to success banks are.
Banks might benefit from using banking KPIs to assess progress toward strategic goals. They should record the rationale for their KPIs.
Once a bank has determined its long-term goals, KPIs can be used to ensure they are met. There needs to be constant tracking of KPIs. To begin, it is necessary to assess each key performance indicator to determine its significance and utility. Next, you’ll need to establish a reporting frequency, a monitoring schedule, and reporting criteria.
Financial Performance KPIs
1. ROA (Return on Assets)
In 2023, the top-performing banks achieved an ROA of around 1.25%, while smaller banks averaged around 1.10%. ROA is a common profitability metric used in the banking industry. It sheds light on the profitability of asset use and the state of the budget.
Formula: ROA = Net Income / Total Assets
2. Return on Equity (ROE)
In the first quarter of 2023, U.S. commercial banking return on equity rose over two points, with the largest increase since early 2021, reaching 12.9%.
The ability of a bank to generate wealth for its shareholders is reflected in its return on equity (ROE). It shows how well cash is being used and how appealing the bank is to potential depositors and lenders.
Formula: ROE = Net Income / Shareholders’ Equity
3. Net Interest Margin (NIM)
In 2023, the NIM for global banks ranged from 2.5% to 3.2%, with regional variations. The profitability of lending and investment activities is shown by the net interest margin, which is the difference between interest income and interest expenses. The report evaluates the efficiency of the bank’s essential functions.
Formula: NIM = (Interest Income – Interest Expenses) / Total Earning Assets
4. Efficiency Ratio
According to S&P Global Market Intelligence statistics, the efficiency ratio of US banks fell to 52.83% in the first quarter from 54.87% in the fourth quarter of 2022 and 61.62% in the first quarter of 2017. The efficiency ratio compares operating expenses to total income. Profitability and cost control improve with a lower ratio.
Formula: Efficiency Ratio = Operating Expenses / Operating Revenue
Asset Quality KPIs
5. Non-Performing Loans (NPL)
In 2023, European banks had an average NPL ratio of approximately 2.9%, with variations among countries. Nonperforming loans (NPLs) measure the quality of the underlying assets. It’s a must for a robust lending portfolio.
Formula: NPL Ratio = (Non-Performing Loans / Total Loans) * 100
6. Loan-to-Deposit Ratio
According to S&P Global Market Intelligence, the industry average increased to 63.6% in the fourth quarter of 2022 from 62% in the third quarter of 2022 and 57.1% in the fourth quarter of 2021. As of the last three months 2019, it was still below the pre-pandemic average of 72.4%.
By comparing loans and deposits, this ratio gauges a company’s liquidity and lending capacity. It is the basis for sound financing and cash management procedures.
Formula: Loan-to-Deposit Ratio = Total Loans / Total Deposits
Capital Adequacy KPIs
7. Capital Adequacy Ratio (CAR)
In 2023, European banks had an average CAR of approximately 15.9%, well above regulatory minimums. CAR measures the adequacy of cash on hand in comparison to risky investments. CAR investment banking KPIs can assure the security and safety of an organization’s finances.
Formula: CAR = (Tier 1 Capital + Tier 2 Capital) / Risk-Weighted Assets
8. Cost-to-Income Ratio (CIR)
A CIR of less than 60% is considered efficient. In 2023, the top U.S. banks reported an average CIR of 59.9%. CIR is a metric for business efficiency that looks at how much it costs to make a profit. When the CIR is low, operations are efficient.
Formula: CIR = Operating Expenses / Operating Income
Customer Satisfaction KPIs
9. Customer Satisfaction Score
Exceptional banks achieve CSAT scores above 80 on a 100-point scale. In 2023, leading U.S. banks had CSAT scores ranging from 78 to 82. Metrics indicate that the approach is producing positive results. We have increased our customer satisfaction rates to over 80% and redirected over 90,000.
In this case, the satisfaction of bank customers is being measured. Happy clients are more inclined to buy again and tell their friends.
Formula: CSAT = (Number of Satisfied Customers / Total Number of Respondents) * 100
10. Net Promoter Score (NPS)
According to Retently’s analysis of NPS data from the last five years, the average NPS for the healthcare industry is between 34 and 20, while the average NPS for the communication and media industry is between 19 and -6.
Using the propensity to provide a suggestion, NPS measures customer loyalty and advocacy. It is a leading indication of both client happiness and the durability of a brand.
Formula: NPS = (Percentage of Promoters – Percentage of Detractors) * 100
11. Customer Acquisition Cost (CAC)
The Customer Acquisition Cost (CAC) measures how much it costs to get new clients. Reduced CAC allows for more effective expansion and the creation of income.
Formula: CAC = Total Sales and Marketing Expenses / Number of New Customers Acquired
Transaction Value KPIs
12. Average Transaction Value
This key performance indicator tracks the average value of a bank’s transactions. It’s crucial for maximizing potential earnings.
Formula: Average Transaction Value = Total Transaction Value / Total Number of Transactions
13. Capital Utilization Rate
This key performance indicator assesses the profitability of the bank’s capital-generation processes. Profitability is increased when money is used effectively.
Formula: Capital Utilization Rate = (Interest Income + Non-Interest Income) / Total Capital
Liquidity Management KPIs
14. Liquidity Coverage Ratio (LCR)
The LCR measures the bank’s liquidity or its capacity to pay down short-term debts. It is essential for monetary security and rules adherence.
Formula: LCR = High-Quality Liquid Assets / Total Net Cash Outflows
15. Loan Portfolio Diversification
By spreading their bets across a variety of loan products and business sectors, borrowers reduce their overall risk exposure. Better protection against sector-specific crises is achieved, and risk management is improved.
Formula: Loan Portfolio Diversification = (Number of Different Loan Types / Total Number of Loans) * 100
Growth and Expansion KPIs
16. Net Asset Growth Rate
This key performance indicator tracks the expansion of a bank’s net assets. It reveals the state of the company’s finances and its potential for growth.
Formula: Net Asset Growth Rate = (Current Year’s Total Assets – Last Year’s Total Assets) / Last Year’s Total Assets
17. Operating Income Margin
Measures how profitable essential business functions are relative to expenses. When the margin is high, the business is running smoothly.
Formula: Operating Income Margin = (Operating Income / Total Revenue) * 100
Mortgage Lending KPIs
18. Mortgage Delinquency Rate
This key performance indicator tracks the amount of overdue mortgage loans. It is a measure of the safety and soundness of mortgage lending.
Formula: Mortgage Delinquency Rate = (Number of Delinquent Mortgages / Total Number of Mortgages) * 100
19. Regulatory Compliance Score
This key performance indicator monitors the bank’s compliance with banking standards. Maintaining credibility and staying out of trouble legally depends on following the rules.
Formula: Regulatory Compliance Score = (Number of Compliance Violations / Total Compliance Audits) * 100
Workforce Productivity KPIs
20. Staff Productivity
Employee productivity is the ratio of production to expenses. Productivity rises thanks to well-organized staffing policies.
Formula: Staff Productivity = Total Output / Total Labor Costs
21. Asset Quality Index (AQI)
The Asset Quality Index (AQI) are risk KPIs for banks for evaluating a bank’s asset quality. It protects the value of assets and reduces the risk of losses.
Formula: AQI = (Total Value of High-Quality Assets / Total Value of Assets) * 100
Core Deposits KPIs
22. Core Deposit Growth Rate
This key performance indicator assesses the expansion of essential deposits. It’s important for maintaining steady funding and managing cash flow effectively.
Formula: Core Deposit Growth Rate = (Current Year’s Core Deposits – Last Year’s Core Deposits) / Last Year’s Core Deposits
23. Digital Engagement Rate
This key performance indicator measures how satisfied customers are with their bank’s online services. In today’s digital era, it’s essential for gaining and keeping clients.
Formula: Digital Engagement Rate = (Number of Digital Interactions / Total Number of Customer Interactions) * 100
Cross-Selling Success KPIs
24. Cross-Selling Success Rate
The level of cross-selling success can be gauged by looking at how well additional items or services are marketed to current clients. It increases earnings by providing additional benefits to current clients.
Formula: Cross-Selling Success Rate = (Number of Cross-Sold Products / Total Number of Customer Transactions) * 100
25. Brand Equity Score
Brand equity measures how well-known and respected a bank’s name is among consumers. Customers are attracted to and kept by a reputable brand.
Formula: Brand Equity Score = (Brand Equity Value / Total Brand Value) * 100
The success of a bank can be gauged by analyzing these 25 banking KPIs metrics. They shed light on the bank’s overall health, efficiency, client happiness, and risk management, among other things. Bank executives can define their organizations’ futures through data-driven decisions based on this set of operational KPIs in banking.
What Can Brickclay Do for Your Business?
Brickclay equips banks by providing data engineering and analytics services that are adapted to the unique needs of the banking industry. Banks can benefit from our expertise in data integration engineering, data analytics solutions, regulatory compliance, risk management, customer analytics, operational efficiency, and digital transformation. They use this information and typical banking KPIs to guide their decision-making and drive progress toward their organizational objectives.
To help banks adapt to the ever-changing financial world, we guarantee their individual demands will be satisfied through our dedication to data protection, constant innovation, and tailored solutions.
Working with Brickclay, you may take advantage of data-driven methods to help build the future of your bank. Contact us today for a transformative data-driven journey.