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Don’t Let Metrics Lead You Astray

If you’ve been using traditional banking metrics to compare your financial institution’s performance to similar banks and credit unions, you’re probably seeing a skewed perspective of your market position.

When it comes to analytics, the adage is, ‘Measure what matters.’ Now’s a great time to reconsider what metrics you really need to track.

The banking industry’s most popular measure of financial vitality is return on equity (ROE). Other common metrics are non-interest income, net interest margin, return on assets (ROA) and efficiency ratio.

If you’ve been using traditional banking metrics to compare your financial institution’s performance to similar banks and credit unions, you’re probably seeing a skewed perspective of your market position.

When it comes to analytics, the adage is, ‘Measure what matters.’ Now’s a great time to reconsider what metrics you really need to track. 

The banking industry’s most popular measure of financial vitality is return on equity (ROE). Other common metrics are non-interest income, net interest margin, return on assets (ROA) and efficiency ratio. 

There are several significant problems with these standard metrics: 

  • They are retrospective. They provide a rear-view perspective on performance that may not tell the story of the current or future market. 
  • They are static. Ratio-based calculations rely on inputs that may not be predictive of future performance. 
  • They reflect a point in time. They can be heavily influenced by one-time events that aren’t reflective of results over a broader period of time. They can also be distorted by accounting decisions. 
  • They don’t consider new players in the market. When analysis is anchored to a select peer group of banks and credit unions, you miss critical information from the broader financial services landscape. 

To update your approach to analytics, start tracking metrics that are: 

  • Dynamic: Capture feedback loops from continuously evolving material changes impacting the business. 
  • Forward looking: Continually validate the outcome accuracy to ensure your approach is working. 
  • Strategic: Synchronize your metrics and enhance the probability of achieving longer-term strategic objectives. 
  • Progressive: Include data that captures soft assets such as intellectual property and human resource considerations, and data from a broader set of competitors. 

Make sure you’re measuring and considering: 

  • Fee-based income from ongoing, profitable clients such as businesses and high-net-worth individuals. Include income from international payments, foreign exchange, wealth management and strategic consulting services. 
  • Industry or sector-specific revenue streams. This is a measure of overall portfolio risk that is stress-tested against changes in the operating environment. 
  • Geographic risk and opportunity. Since community banking is no longer defined exclusively by geographic region, capture the level of risk and opportunity associated with a continued geographic focus versus a niche that transcends a local economy. 
  • Immeasurable assets. These are soft assets that enhance or detract from your competitive positioning including goodwill, digital competency, brand influence, institutional knowledge and strategic partnerships.

 Of course, traditional metrics still have a place in your toolbox, but there is so much more to discover. Don’t be limited – know your full story.

 
Stephen Kuhl, CFA, is the Head of Financial Institutions and Strategic Partnerships for Western Union Business Solutions.