Efficiency Ratio A bank’s efficiency ratio is similar to a company’s operating margin. It explains the amount bank pays on operating expenses such as marketing and salaries. The lower the ratio better is the operating margin. It is measured as bank’s overhead as a percentage of its revenue. Efficiency ratio= Total non-interest expenses/ (Total net interest income (before provisions) + Total non- interest Income) For example: If Bank XYZ’s expense (excluding interest expense) is $5000000 and its revenue is $10000000, then the ratio is $5000000/$10000000= 50%. Hence it costs Bank XYZ $0.50 to generate $1 of revenue. Interest expenses are not included because they are investing decisions. The expense in the above case includes salaries, rent and …show more content…
In general 50% is considered to be the optimal ratio. An increase in the value of efficiency ratio is an indicator of either increasing expense or decreasing revenue. Various Business models provide different bank efficiency ratios with similar revenues. For example- An emphasis on customer service may decrease the efficiency ratio of a bank but eventually it leads to increase in net profit. Banks which focus more on controlling expense will have higher efficiency ratio but may have lower profit …show more content…
The comparison of banks based on Efficiency ratio is fast and feasible. The ratio is considered to be meaningful for investors. Comparisons of banks in different countries reveal significant differences in interest rates, commission fees and factor costs. As these elements are incorporated in the efficiency ratio calculation, banks situated in a country with comparatively high interest margins ceteris paribus appear to be more productive than others. The balance sheet policy of a bank affects the refinancing costs along the yield curve. These costs are considered in the interest earnings and thus have an impact on the efficiency ratio as
Equity ratio and debt ratio are both very important because it shows how much of the assets used for production is really owned by the owner of a company. According to calculations in the appendix, RBC has the highest equity ratio and the lowest debt ratio. This is considered favourable compared to Sun life and BMO’s equity and debt ratio. When it comes to return on total assets BMO has the highest return. Meaning it is earning more per assets than RBC and Sun
Analysing the ratio of one with the other in the industry provides for better understanding about the performance of the company in market. An investor has to make a comparative analysis before making any investment decision.
Garbato, Debby. “A Model Of Efficiency.” Retail Merchandiser 44.6 (2004): 16-20. Business Source Premier. Web. 26 Feb. 2012
Notably, its share price has dropped 43% just in the last year, after the publication of the year losses of €6.8 billion (remarkably €2.8 billion more than the losses of 2008) . The ROE for the bank passed from 7.89% in 2010 to minus -9.02% at the end of 2015. Based on the figures in the latest interim report in July 2016 the ratio decreased further to -11.52% in June . Considering this trend, we need to take into account also that in recent years, the ROE was consistently below the cost of capital, eroding value. A company can increase its ROE in 2 ways: increasing the numerator - raising your net income - or decreasing the denominator – the equity capital. Banks represent generally a capital-intense business, and the introduction of tighter regulations is posing difficulties to the banks that aim to reduce their equity capital. It appears clear that the only way to achieve a better ROE is to attain a high financial leverage . The pre-financial crisis leverage level was impressive (71.73%), and today is 27.11%, above the standard of its direct competitors .The return on assets has also decreased in the last six years and has reached a negative level of -0.46%
Efficiency evaluates how well the company manages its assets. Besides determining the value of the company's assets, you and your client should also analyze how effectively the company employs its assets. Wal-Mart return on sales is 3%, Target return of sales are 1%, the industry ratio is 2%. Wal-Mart sales are above the industry and are good, but Target is below and needs improvement to operate efficiently. Wal-Mart’s return on asset was 1 and Target’s is 2, and the industry ratio 1.92.Wal-Mart’s is below and need improvement and Target’s is excellent. Earning per share for Walmart is 25 and Target’s is 63.1 and the industry is 59.1. Since Wal-Mart’s is lower they need improvement, whereas Target’s is a little higher and is good but closer to the industry
Ratios analysis also makes possible comparison of the performance of different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future.
... organization's management. The ratios were broken down into classifications of liquidity and asset utilization, debt and interest coverage, profitability and market-based ratios.
Ratios traditionally measure the most important factors such as liquidity, solvency and profitability, as well as other measures of solvency. Different studies have found various ratios to be the most efficient indicators of solvency. Studies of ratio analysis began in the 1930’s, with several studies of the concluding that firms with the potential to file bankruptcy all exhibited different ratios than those companies that were financially sound.
Profit,i = Pqi – Cqi where P stands for revenue and C stands for costs
Since the early 1990s, the Jamaican banking sector has experienced significant structural changes stemming from a disorderly financial liberalization process, which preceded a severely disruptive financial crisis. As such, the last decade has important lessons about factors influencing the relationship between competition and concentration, which has been unexplored. Over the last few months commercial banks have been under fire for their high-loan interest rates and wide spread between their fixed deposits savings accounts and lending rates.
The performances of Current market price of the public sector and private sector banks are analyzed in this section. The Monthly movement of Current market price of the public sector and private sector banks is analyzed and the result is given in Table 2.1.
Efficiency is highly prized in a culture turned toward productivity. It is therefore cultivated in contemporary business administration theories. It also tends to be prized above all other values in modern society, as society is more and more oriented toward technological advancement. Efficiency is also defined here as the most economic or the shortest or fastest or most simple way of realizing or achieving a goal with the least cost.
Efficiency is a concept widely used by economists, engineers, organization theorists, consultants, politicians, managers and others. It figures large in the many vocabularies that abound in the world today and it seems that 'efficiency' is one of the focuses of Western culture.
Organization performance is the performance effectiveness and the performance efficiency. The performance effectiveness is the measure of the task or goal accomplishment, it would be to what degree of a goal achieve. Managers who chose the right goals and achieve it can be say performance effectiveness. Besides, the performance efficiency is the measure of the resource cost associated for the goals, it would be how much of the resources are used and how productivity of resources. The more time and resources are saved in achieving goals, the most efficient production supervisor is.
Bank profitability has always attracted the interest of academics, economists, and policymakers. With increasing regulation during the global financial crisis, however is gives an understanding of what drives bank profits is increasingly crucial. Literature that has examined bank profitability in many countries in the l...