How to Calculate the Primary Capital Asset Ratio for a Bank
Original post by Bryan Keythman of Demand Media
A bank’s primary capital ratio measures its primary capital as a percentage of total assets. Primary capital consists of money from sources such as common stock and preferred stock. Unlike other sources of money that a bank must pay back, such as money from customer deposits, primary capital is considered more permanent. A higher primary capital ratio means a bank has a greater financial cushion in case its business suffers losses. You can calculate a bank’s primary capital ratio using information from its annual report.
Find a bank’s balance sheet in its 10-K annual report. You can obtain this report from the investor relations section of the bank’s website or from the U.S. Securities and Exchange Commission’s EDGAR online database.
Identify the amounts of total stockholders’ equity, total assets and loan-loss reserves on the balance sheet. The amount of loan-loss reserves is money a bank sets aside in case some of its loan borrowers cannot repay. For example, assume a bank has $100,000 in total stockholders’ equity, $1.5 million in total assets and $10,000 in loan loss reserves.
Add together total stockholders’ equity and loan-loss reserves to calculate primary capital. In this example, add $100,000 in total stockholders’ equity and $10,000 in loan-loss reserves to get $110,000 in primary capital.
Divide primary capital by total assets. Multiply your result by 100 to calculate the primary capital ratio. In this example, divide $110,000 by $1.5 million to get 0.07. Multiply 0.07 by 100 to get a 7 percent primary capital ratio.
Tips & Warnings
- Compare a bank’s primary capital ratio with those of its competitors to compare its risk level with its peers.
- John Wiley & Sons, Inc.: Banks and Other Depository Institutions
- Financial Markets and Institutions, Ninth Edition; Jeff Madura
- Financial Times Lexicon: Loan-Loss Provision
About the Author
Bryan Keythman has performed stock investment research and writing for a consulting firm since 2008. He also has prior experience sourcing and underwriting commercial real-estate investment and development opportunities for a commercial real-estate developer. Keythman holds a Bachelor of Science in finance.
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