Efficiency Ratio
Measures operating costs as a percentage of revenue.
Definition
The efficiency ratio shows how much a bank spends in operating expenses to generate each dollar of revenue. A lower ratio is better—it means the bank converts more of its revenue into profit. Top-performing banks often achieve efficiency ratios below 55%.
Formula
Efficiency Ratio = Noninterest Expense / (Net Interest Income + Noninterest Income) × 100
Why It Matters
The efficiency ratio reveals management's ability to control costs. Banks investing heavily in technology may see temporary ratio increases that improve long-term efficiency. Consistently high ratios (above 65%) may signal structural cost problems.