My key KPI: Net interest margin and loan to deposit ratio

Key KPI
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Welcome to ‘My key KPI’, a new weekly content series where we ask CFOs and FDs what metrics and measures they use to drive their businesses forward.

The aim is to understand how different finance professionals, across a broad array of industries and sectors, use data to inform their decision making.

This week it's Michael Brierley, the CFO of Metro Bank

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My key KPI: Net interest margin and loan to deposit ratio

There’s a brilliant Michael Brierley quote in Chris Goodfellow’s recent AccountingWEB feature where you realise just how far Metro Bank’s CFO has come with his employer: “When I get my payslip every month it has ‘1’ in the top right-hand corner,” he explained. “There was nothing when I arrived, we were looking at a blank sheet of paper.”

First on the to-do list was to implement a payroll system. He had to get paid, after all. After that, he had to about helping to build a new bank. When Metro Bank broke ground, it was the first new bank in over a century. The newbie institution found itself lining up against some frightfully big incumbents.

Metro Bank didn’t just want to be a scrappy, quixotic challenger. From day one it’s attempted to cultivate a stable financial pedigree, and metrics and KPIs have played a central role in this conservative philosophy.

The game has changed a lot since those early days. For Brierley, his role is barely recognisable. “At the end of Q3, we had circa £15bn in assets, which is a 52% change in the year. Which sounds like a huge change, but the reality is the law of big numbers is setting in now and that 52% is coming down all the time and the absolutes are going up.

“The loans are up 56% year-on-year. We're talking about very high growth rates indeed. That needs to be managed very carefully.” Monitoring the KPIs and metrics are a big part of that, he explained.

We have what we call on the P&L ‘positive open jaws’, which is a great term describing the fact that revenue is increasing way faster than expenses.”

So what are some key metrics for Metro Bank? “Clearly we have a lot,” said Brierley, “But the two that spring to mind immediately are net interest margin (NIM) and loan to deposit ratio (LDR)”.

Addressing net interest margin, Brierley explained its importance is linked to the abiding “low interest rate environment” in the UK. “That’s generally not good for banks, their NIM and their returns.”

NIM measures the difference between the interest income generated by banks and the amount of interest it pays out, relative to the amount of their interest-earning assets. So as a sum it’s formulated as: interest returns - interest expenses/average earning assets.

According to Brierley, he’s had to focus on NIM particularly because it’s been distorted by government funding actions, like the funding for lending scheme and the term funding scheme (which ends this February). “Broadly speaking these schemes provided cheap funds to banks, which distorted NIM so you have to pay a little more attention to what’s actually happening.”

Brierley’s second big focus is loan to deposit ratio. “In the early days, because we are a conservative bank, our business plan called for a very low LDR. Pre-crash, a lot of banks had loan to deposit ratios of 120-130%. Although they have now brought them down. We've always aimed for a low ratio.

“Very early on we proved we were a deposit gathering machine. Customers would come to us for customer service and convenience. The first thing you need is to get the customers, then their current account and then you need to lend it safely.”

The first thing you need is to get the customers and then their current account and then you need to lend it safely.”

Metro Bank’s knack for customer acquisition afforded the bank more time. They didn’t need to rush into lending. “We started off with a very low LDR and we attracted a good deal of attention from analysts who wondered about our ability to lend.

“What we were actually doing is being very sensible and cautious. The LDR is intimately linked to NIM because a high LDR feeds into a higher NIM.”

Brierley’s cautious stewardship has yielded significant rewards for the still fledgling bank. It has experienced five consecutive profitable quarters. “What we've said to the market is 2018 will be our first year of consecutive profitability,” he said.

“We have what we call on the P&L ‘positive open jaws’, which is a great term describing the fact that revenue is increasing way faster than expenses. Annual growth rates are 46% compared to 35% on expenses.

“To paraphrase someone else, ‘keep doing that year-on-year, happiness ensues.”

About Francois Badenhorst

Francois

I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter. 

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01st Feb 2018 16:09

More three letter acronyms designed to make the rest of us feel inferior

The story is this guy monitors business indicators to manage his business - what a stunning revelation !

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