The efficiency ratio is non-interest expenses over the sum of net interest income before provision for loan losses plus non-interest income.
It's analogous to dividing operating expenses into revenues. What you get is the percentage of revenues you're spending on operating expenses. The lower the ratio, the better. Numerically, 1 (the numeral 1) minus the efficiency ratio equals a bank's operating margin. Banking executives were obsessed with this ratio after the S&L fallout and the real estate implosion in the northeast and west coast in the early 1990s.
A middle of the road bank runs an efficiency ratio of .7 to 0.8; a good bank from 0.6 to 0.7, and the really lean operations run under 0.6.
Recent Mentions on Fool.com
- The 2 Best Stocks for Investing in Regional Banks
- Warren Buffett Just Bought More Of These Two Bank Stocks. Should You Do The Same?
- UBPR: Using Bank Reports to Find Great Bank Stocks
- How One Stock Has Crushed the Competition For 10 Years Running
- The Competitive Advantage of the Best Bank Stocks
- Prospect Capital Corp.: A First-Ever Look at One of Its Largest Investments