Welcome to ‘My key KPI’, our weekly content series where we ask CFOs and FDs what metrics and measures they use to drive their businesses forward.
In this week's edition, AccountingWEB caught up with James Heath, the new CFO of CivilisedBank, one of the new breed of challenger banks. He spoke to us about sustainable growth, moon shots and, of course, his key KPI.
My key KPI: Return on equity and cost-income ratio
The aim is to understand how different finance professionals, across a broad array of industries and sectors, use data to inform their decision making.
“It’s like sending a rocket to the moon,” said CivilisedBank’s new CFO James Heath, “if you’re a few degrees out it might not look important now, but in few years’ time, it has a huge effect.”
The analogy says a lot about what CivilisedBank is hoping to achieve. The challenger bank received its banking license in May 2017 and is now building its technology and operations with the aim to start serving customers in early 2018.
Heath is one of the bank’s latest hires, joining from ABN Amro. His role will involve shepherding the fledgeling bank’s finances through its first steps in finance. Metrics and KPIs, he tells AccountingWEB, will take on an even bigger importance.
“There are myriad other underlying KPIs I’d look at, operational KPIs in terms of how long it takes a loan to get through the operational pipeline and so on. There are hundreds of those.
“But if you had to pinpoint what the two headline things, then it’s return on equity and cost-income ratio.”
Both are classic KPIs in the banking industry, formulated by dividing the bank’s net income with its shareholders’ equity. It offers a cold, hard look at the bank’s profit-generating efficiency.
This is complemented by cost-income ratio, which divides operating costs (administrative and fixed costs and not including bad debts) by operating income. The lower it is, the more profitable the bank will be.
“You need to constantly make those adjustments to your forecasts and actual positions. And you can do that in a smaller, nimble business. You can keep also make those adjustments depending on what’s going with your customers, your market and the economy.”
The pace of growth for CivilisedBank is one of Heath’s main concerns. Like any business, the bank has limited resources, be that capital or funding.
“You have to manage those to the best of your ability. You don’t want to enter into too much front-line business if you don’t have the operational pipeline to deal with.”