How to measure performance of Banks and calculate profit

Read this article to know how the profitability of a bank can be measured. Read this article to know the factors or tools that are used as indicators for the measurement of performance of banks.

The profitability of any business determines whether the business is successful or not. Banks, although deal in money, it doesn't mean that they are profitable. Also, you cannot gauge performance of a bank on basis of customers depositing the money in the bank account. Consequently, the banks need to maintain their liquidity to keep their business going on. They need cash to minimize the risks and to increase the level of productivity. To maintain their performance, they need right kind of data in their hand. To obtain such data, banks need to monitor or evaluate their key performance indicators. KPI provides a benchmark for success of any business.

Use of KPI index for measurement of bank performance

In present times, there are different approaches to evaluate bank's performance, but KPI is considered as easiest one to use. The KPI is useful because it not only provides financial indicators, but also provides a measure to check employee performance, satisfaction of customers and productivity of processes. However, mission of every business is to earn lot of money to gain prominence in the society. Hence, KPI is an effective indicator that helps banks to gauge on their financial performance. The most used KPI parameter is profitability KPI's.

Return on Equity Indicator as a tool for measurement of bank performance

The return on equity indicator. It is also known by the name of profit to equity KPI. It provides the details of capital contributed by shareholders along with the effect in the activities. To calculate this KPI, you need to multiply net profit by capital and multiply the answer by 100, to measure the performance in percentage.

Return on assets KPI as a tool for measurement of KPI

The next indicator to assess the performance of banks is return on assets KPI. It is one performance indicator that measures ability of a bank to manage assets or it shows the ability to use resources to generate profit. In present times, banks consider it as an important parameter that can measure the bank's activity. Moreover, it provides an exact calculation about the bank's activity. You get ROA by dividing net profits by total assets and multiply it with 100 to get the figure in the form of percentage.

Leverage multiplier ratio as a tool for measurement of KPI

The next most essential way to monitor performance of any bank is through leverage multiplier ratio. The amount of capital kept as a reserve is the basis of leverage multiplier ratio. The amount kept as a reserve can be used for unforeseen emergencies or to back up investments or lending. It is indicated by dividing assets with the capital. For example, a commercial bank is taking primary deposits of customers to lend money to other individuals. Supposedly, the bank has hundred thousand dollars as a reserve and one million dollar is lent to the debtors for financing purposes. Now if we divide hundred thousand dollar by one million dollar and multiply it with 100 we get 10 percent. It is a leverage ratio of the bank. Banking performance provides you an idea how well the economy is doing. To get a clear picture, what your bank is upto, you can use above mentioned performance indicators. Thus, if you are interested in banking performance, you can check out the below mentioned parameters too.

Book Value as a tool for measurement of performance of bank

Book Value measures the exact value of bank's assets on the balance sheet. It is calculated by taking cost of an asset minus accumulated depreciation. It is also known by the name of Net Book Value; the higher the NBV value, the good the bank is performing.

Net Income after capital charge as a tool for measurement of performance of bank

The net income after capital charge can be calculated by deducting tax from the income less the equity cost of capital. It permits investors to see the value of cash today versus value of cash tomorrow.


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