Retail Banking Measurements

Lack of organizational strategies based on clear and accurate measurements can impede banks as they strive for customer profitability.

For banking institutions worldwide, today's business climate is increasingly complex and technology driven. To achieve success in this competitive environment, it is crucial to develop customer-oriented business strategy aimed at reducing operational and business risks and maximizing profitability.

Efficient banking strategy helps improve channel productivity and performance, gain visibility into the most profitable customer segments, identify areas for improvement, increase revenue from new business and via cross-sell, as well as reduce cost rates, defaults, and losses. Centralized risk management program across the organization helps develop ongoing enterprise risk reporting system in order to gain access to a broad range of reporting data in a central, consistent source.

Even the most powerful strategy cannot be carried out without the organizational structures to support it. Retail banking organizations usually face the following problems: multiple distribution channels delivering inconsistent customer services; diverse and incoherent planning and management information systems providing for different targeting approaches across the channels, based on different methodologies and technologies; several legacy technology platforms across and within distribution channels implemented at core operational system and business intelligence delivery levels.

The strategy for retail banking should be based on a set of measurements (metrics). For more easy understanding, we classified these metrics in six categories: Income metrics, Investment return metrics, Cost metrics, Interest margin metrics, Company assets metrics, and Risk metrics.

Income metrics include the following measurements: Non-interest income level (non-interest income divided by operating income), Fee income level (fee income divided by operating income), Gross profit (sales minus cost of sales), and Interest spread (interest income divided by interest earning assets, minus interest expense divided by interest bearing liabilities).

Investment return metrics include a usual set of ROI measurements: Return on capital employed (earnings before interest and tax (EBIT) divided by the total capital employed), Return on operating capital (earnings before interest and tax (EBIT) divided by the total capital employed minus investments), and Return on Equity (net income after tax divided by average ordinary capital).

Cost metrics comprise the following ratios: Cost to assets ratio (operating expenses divided by average assets over the period), Overhead cost ratio (sales, general and administrative costs divided by the total costs), and Cost to Income (operating expenses divided by operating income).

Interest margin metrics are based on Profit margin (profit divided by sales), Operating margin (operating profit divided by sales), and Interest margin (interest income minus interest expense, divided by average interest earning assets) measurements.

Company assets metrics help evaluate "Non-performing" assets (the amount of non-performing loans divided by the total amount of loans), Return on average assets (net profit divided by average assets), and Reserve requirement (a proportion of deposits that cannot be lent to borrowers)

Finally, Risk metrics include Value-at-risk (the largest amount of capital that a company risks losing with a given level of confidence) and Capital adequacy ratio (the amount of capital that must be held in relation to risk-weighted assets) measurements.

In conclusion, the combination of efficient banking strategy, fully exploited data, and the right measures to drive the right behaviors allow financial organizations to deliver sustainable customer profitability and reduce business and operational risks.

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