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The efficiency ratio, a ratio that is typically applied to banks, in simple terms is defined as expenses as a percentage of revenue (expenses / revenue), with a few variations. A lower percentage is better since that means expenses are low and earnings are high. It is related to operating leverage, which measures the ratio between fixed costs and variable costs.

Contents

Example

If expenses are $40 and revenue is $80 (perhaps net of interest revenue/expense) the efficiency ratio is 0.5 or 50% (40/80). Efficiency ratio is essentially how much you spend to make a dollar. In the above example, they spent $0.50 for every dollar they earned in revenue.

Citigroup

Citigroup, Inc. 2003:

  • Revenues, net of interest expense: 77,442
  • Operating expenses: 39,168

That makes operating expenses / revenue = 39,168/77,442 = 0.51 or 51%. The efficiency ratio is 0.51 or 51%.

Alternative

If "benefits, claims, and credit losses" are added to operating expenses the ratio gets worse.

51109/77,442=0.66

Alternative

If it's calculated as revenue divided by expenses (interest expense, "benefits, claims, and credit losses", operating expenses) it becomes 1 less the "income from continuing operations" margin.

68,380/94,713=0.72

See also

External links

Example


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