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
- Citigroup Inc. Earnings: Will the Bank Reassure Scared Investors?
- Wells Fargo & Co. Once More Delivers Record Earnings as Earnings Per Share Rise 14%
- These 3 Charts Show Why New York Community Bancorp Is So Unique
- Citigroup's Profit Target is Dead
- 3 Things to Watch For When Bank of America Corp Announces Earnings
- Bank of America Needs to Fix This Before Investors Will Get Rich