Liquidity Coverage Ratio = High-Quality Liquid Asset Amount / Total Net Cash Flow Amount The formula for the liquidity coverage ratio is: Specifically, it measures the ability of a bank to meet short-term (within 30 days) obligations without having to access any outside cash. Liquidity Coverage RatioĪs the name suggests, the liquidity coverage ratio measures the liquidity of a bank.
That would suggest inefficiencies in operations. On the other hand, if the operating leverage ratio is negative, then the bank is accumulating expenses faster than revenue. Operating Leverage = Growth Rate of Revenue – Growth Rate of Non-Interest ExpenseĪ positive ratio shows that revenue is growing faster than expenses. The formula for calculating operating leverage is: It compares the growth of revenue with the growth of non-interest expenses.
Operating leverage is another measure of efficiency. A lower efficiency ratio shows that there is less non-interest expense per dollar of revenue. However, non-interest expenses, such as marketing or operational expenses, can be controlled by the bank. The efficiency ratio does not include interest expenses, as the latter is naturally occurring when the deposits within a bank grow. The efficiency ratio assesses the efficiency of a bank’s operation by dividing non-interest expenses by revenue.Įfficiency Ratio = Non-Interest Expense / Revenue Net Interest Margin = (Interest Income – Interest Expense) / Total Assets Ratios for Efficiency 1. The majority of a bank’s revenue is derived from collecting interest on loans. Since the bank funds a majority of their operations through customer deposits, they pay out a large total amount in interest expense. Unlike most other companies, the bulk of a bank’s income and expenses is created by interest. Net interest margin measures the difference between interest income generated and interest expenses. Also, since financial strength is especially important for banks, there are also several ratios to measure solvency. Similar to companies in other sectors, banks have specific ratios to measure profitability and efficiency that are designed to suit their unique business operations. Problems with the Operating Expense RatioĪ potential problem with this measurement is that depreciation could be accelerated or straight-line, resulting in different outcomes depending on the depreciation method used.Bank-specific ratios, such as net interest margin (NIM), provision for credit losses (PCL), and efficiency ratio are unique to the banking industry. Loan payments and capital improvements are excluded from this figure. Operating expenses include maintenance and repairs, trash removal, property management fees, insurance, utilities, and property taxes. = 70% Operating expense ratio Types of Operating Expenses This results in the following operating expenses ratio:
Example of the Operating Expense RatioĪ small apartment complex brings in $1,000,000 of gross revenue every year, has operating expenses of $770,000 and depreciation of $70,000. The ratio can also worsen due to poor property management, where a property has a higher-than-normal vacancy rate that keeps the gross revenue figure unusually low. The ratio tends to worsen over time as a property ages, requiring higher maintenance expenditures. Indicators of problems that can worsen this ratio are higher-than-normal utility charges or maintenance expenses. The measure is commonly used to compare the performance of similar properties. (Total operating expenses - Depreciation) / Gross revenue = Operating expense ratio It is calculated by subtracting depreciation from a property’s operating expenses and then dividing by its gross revenue. A property is more acceptable to an investor when the operating expense ratio is as low as possible. The operating expense ratio is used in real estate to measure the proportion of expenses to revenues for an income-producing property.