What is efficiency ratio in banking?

The efficiency ratio is a profitability metric that can determine the operating efficiency of a bank. Calculating the efficiency ratio involves comparing the bank’s operating expenses to its income.

What are bank-specific ratios?

Bank-specific ratios, such as net interest margin (NIM), provision for credit losses (PCL), and efficiency ratio are unique to the banking industry. Similar to companies in other sectors, banks have specific ratios to measure and efficiency that are designed to suit their unique business operations.

What does a low efficiency ratio mean?

Since a bank's operating expenses are in the numerator and its revenue is in the denominator, a lower efficiency ratio means that a bank is operating better. An efficiency ratio of 50% or under is considered optimal. If the efficiency ratio increases, it means a bank's expenses are increasing or its revenues are decreasing.

How does bank XYZ's efficiency ratio work?

How Does the Bank Efficiency Ratio Work? For example, if Bank XYZ's costs (excluding interest expense) totaled $5,000,000 and its revenues totaled $10,000,000, then using the formula above, we can calculate that Bank XYZ's efficiency ratio is $5,000,000 / $10,000,000 = 50%. This means that it costs Bank XYZ $0.50 to generate $1 of revenue.