Bank Efficiency Ratio

Bank efficiency ratio, abbreviated as ER, is used to evaluate the operational efficiency and profitability of a bank or financial institution.  It measures how much a bank spends to generate revenue.  The lower the ratio, the more efficient the bank is considered to be in managing its operating expenses relative to its revenue.

A lower bank efficiency ratio indicates that a bank is able to generate more revenue relative to its operating expenses, which is generally considered favorable.  Conversely, a higher ratio suggests that the bank may be less efficient in managing its expenses relative to its revenue, which could impact its profitability and overall financial health.  Different banks may have varying target efficiency ratios based on their business models, market conditions, and strategic objectives.

 

bank efficiency ratio Formula

\( ER =   E_{ni} \;/\; NII + I_{ni} - CL  \)

Symbol

\( ER \) = bank efficiency ratio

\( E_{ni} \) = non-interest expense

\( NII \) = net interest income

\( I_{ni} \) = non-interest income

\( CL \) = provision for credit losses