Banking KPIs to track

1. Net Asset Growth Rate

A positive rate shows effective asset management and strategic growth, suggesting that the bank is successfully leveraging its resources to increase its financial strength and market presence.

A negative rate shows underlying issues such as poor asset utilization, increased liabilities, or market challenges.

2. Operating Income Margin

The profitability of a bank’s core operations is measured by comparing its operating income to its revenue, a metric often referred to as the operating income margin. This ratio is crucial for assessing the efficiency of a bank’s operations, showing how effectively the institution generates profits from its primary business activities, excluding non-operating income and expenses.

A high operating income margin shows that the bank is managing its operating costs well and maximizing revenue from its core services, such as lending, deposit taking, and financial services.

A low operating income margin shows inefficiencies, such as high operating expenses or inadequate revenue generation, which could undermine profitability and long-term viability.

3. Deposit Growth Rate

The deposit growth rate measures the percentage increase or decrease in a bank’s total deposits over a specific period, typically expressed on an annual basis. This metric is crucial for assessing the bank’s ability to attract and retain deposits, which serve as a primary source of funding for its lending activities.

A positive rate shows that the bank is successfully attracting new customers and maintaining the loyalty of existing ones, enhancing its capacity to generate stable and low-cost funding for loans.

A negative rate shows challenges such as competitive pressures, declining customer trust, or inefficiencies in customer service, potentially leading to liquidity issues and increased reliance on more expensive funding sources.

4. Loan-To-Deposit Ratio

The loan-to-deposit ratio measures the proportion of a bank’s deposits that are lent out as loans, offering crucial insights into the institution’s liquidity, lending capacity, and risk exposure.

A high ratio shows that a large percentage of deposits are being utilized for lending, which can enhance profitability through interest income. A low ratio shows conservative lending practices and ample liquidity but could also suggest inefficiencies in utilizing deposits to generate income.

5. Loan Approval Rate

The loan approval rate measures the percentage of loan applications that are successfully approved by financial institutions, serving as a critical indicator of a bank’s lending policies and customer accessibility to financing.

A high rate shows that a greater proportion of customers can secure the financing they need, which can indicate a more inclusive and customer-friendly approach to lending.

A low rate shows stringent lending criteria or potential issues in the loan application process, which could discourage potential borrowers and limit the bank’s loan growth.

6. Loan Default Rate

The loan default rate is a metric that measures the proportion of loans in a portfolio that have defaulted within a specified period, indicating the percentage of loans that borrowers have failed to repay according to the agreed-upon terms. This metric is crucial for understanding the credit risk associated with a bank’s lending activities.

A high rate shows underlying issues such as poor credit assessment processes, critical economic conditions, or ineffective risk management strategies.

7. Return On Assets

Return on assets measures a company’s profitability relative to its total assets. It provides valuable insights into how efficiently a business is utilizing its assets to generate profit. This is a crucial metric for guiding strategic decisions on resource allocation and investment.

A higher ROA shows that the company is effectively converting its investments in assets into income. This efficiency can result from factors such as effective cost management, optimal asset utilization, and strong operational performance.

A lower ROA shows inefficiencies in asset management or operational processes. It prompts businesses to evaluate and improve strategies for enhancing profitability.

8. Return On Equity

Return on equity measures the profitability of a bank in relation to the shareholders’ equity. It provides insights into how effectively the bank is utilizing the equity invested by its shareholders to generate profits. This is crucial for assessing the bank’s ability to generate returns for its shareholders.

A higher ROE shows that the bank is efficiently using shareholder funds to generate profit. This efficiency can result from factors such as effective asset management, prudent risk management, and strategic decision-making in lending and investment activities.

A lower ROE shows challenges in generating profits relative to the equity invested. It prompts banks to evaluate factors affecting profitability, such as operational expenses, loan quality, interest income, and market conditions.

9. Current Ratio

The current ratio is a metric used to assess a company’s short-term liquidity and its ability to meet immediate financial obligations.

A higher ratio shows a stronger ability to meet short-term obligations without relying heavily on external financing or asset liquidation.

A lower ratio shows inadequate liquidity management or excessive short-term liabilities relative to assets, necessitating adjustments in financial strategies or operational efficiencies to improve balance sheet health.

10. Net Charge-Off Rate

The net charge-off rate is a percentage of loans that are written off as losses after deducting recoveries from previously charged-off loans. This metric provides a clear picture of the proportion of a lender’s loan portfolio that is deemed uncollectible or has defaulted within a specific period, typically on an annual or quarterly basis.

A high rate shows a significant portion of loans are being written off as bad debts, which can signal issues with credit risk assessment, economic downturns, or ineffective collection strategies. A low rate shows that the lender’s credit policies and risk management strategies are effective in minimizing loan defaults and maximizing recoveries from bad debts.