Banking Scorecards for Customer Profitability

With today's business climate becoming more technology-driven and complex, banking institutions all over the word are working towards developing customer-driven business strategies that aim to minimize operational risks and maximize profitability all the same. This includes banking scorecards.

Effective and efficient strategies in banking can boost channel performance and productivity, access profitable market segments, raise revenue through cross-sell and from new ventures, minimize costs, losses and defaults and identify weak points for further improvement. Integrated risk management across the organization can help create continuous risk reporting system that can provide access to a wide range of reporting data in a consistent and centralized source.

No matter how brilliant the strategy is, it still cannot be effectively implemented without supporting organizational framework. Retail banking institutions commonly experience problems such as inconsistent delivery of customer services from distribution channels; incoherent and varied planning and management information systems that result to diverse target approaches throughout the channels, which are taken from various approaches and technologies; diverse legacy platforms within and across distribution channels carried out at intelligence delivery and core operational business systems.

Retail banking strategies should be derived from a set of metrics. These measurements can be classified into company assets metrics, cost metrics, income metrics, interest margin metrics, investment return metrics and risk metrics. Company assets metrics can help evaluate non-performing assets, return on average assets and reserve requirement.

Cost metrics consist of ratios such as cost to assets ratio, which is operating expenses divided by the average assets over the period; cost to income, which is operating expenses divided by the operating income and overhead cost ratio, which is administrative, general, sales costs divided by total costs.

Measurements included in income metrics include gross profit, which is the difference between sales and cost of sales; fee income level, which is fee income divided by the operating income; interest spread, which is interest income divided by the interest earning assets and then deducted by the interest expense divided by the interest bearing liabilities non-interest income level, which is non-interest income divided by operating income.

Meanwhile, interest margin metrics are derived from profit margin, operating margin and interest margin measurements.

On the other hand, investment return metrics come with the usual set of return on investment (ROI) measurements such as return on equity, which is net income after tax divided by average ordinary capital; return on capital employed, which is earnings before tax and interest divided by total employed capital and return on operating capital, which is earnings before tax and interest divided by total employed capital minus investments.

Lastly, risk metrics comprise value-at-risk, which is the largest capital amount that a business can risk of losing with a certain degree of confidence as well as capital adequacy ratio, which is the capital amount that should be held with regard to risk-related assets.

Combination of efficient and efficient banking strategies, fully exhausted data and proper measures such as banking scorecards to enable financial institutions to provide substantial customer profitability, generate the ideal behaviors and minimize operational and business risks.

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