How to Calculate Expense-to-Revenue Ratio

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Investors and analysts commonly use the efficiency ratio, or expense-to-revenue ratio, to compare a bank's expenses to its revenues. The ratio equals non-interest expense divided by the sum of net interest income and non-interest income and shows, as a percentage, how much money a bank spends to generate each dollar of revenue. A lower percentage ratio means a bank is more efficient at generating revenue, while a higher percentage suggests inefficiency. You can compare the expense-to-revenue ratio of a bank to that of its competitors and the industry average to determine how efficient a bank is compared to others.

Things You'll Need

  • Bank's income statement
  • Find a bank's total non-interest expense on its income statement. A bank typically provides the total amount of non-interest expense, which includes items such as salaries, rent, depreciation and utilities.

  • Find a bank's net interest income and non-interest income on its income statement. A bank typically provides the total of each amount. Non-interest income includes items such as fee income and service charges.

  • Calculate the sum of net interest income and non-interest income. For example, add $400,000 in net interest income to $600,000 in non-interest income. This equals $1 million in total net interest income and non-interest income.

  • Divide the bank's total non-interest expense by the sum of its net interest income and non-interest income to determine its expense-to-revenue ratio. For example, divide $450,000 in non-interest expense by the $1 million sum of net interest income and non-interest income. This equals 0.45.

  • Move the decimal two places to the right in your result to convert it to a percentage. In the example, convert 0.45 to 45 percent, which is the bank's efficiency ratio.

Tips & Warnings

  • You can also apply this ratio to companies in other industries, such as telecommunications, by dividing total operating expenses by total revenues.

References

  • Photo Credit Comstock/Comstock/Getty Images
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