What are the financial ratios of a bank?
Common ratios to analyze banks include the price-to-earnings (P/E) ratio, the price-to-book (P/B) ratio, the efficiency ratio, the loan-to-deposit ratio (LDR), and capital ratios.
Common ratios used are the net interest margin, the loan-to-assets ratio, and the return-on-assets (ROA) ratio. Net interest margin is used to analyze a bank's net profit on interest-earning assets like loans, while the return-on-assets ratio shows the per-dollar profit a bank earns on its assets.
5 Essential Financial Ratios for Every Business. The common financial ratios every business should track are 1) liquidity ratios 2) leverage ratios 3)efficiency ratio 4) profitability ratios and 5) market value ratios.
Your particular ratio in addition to your overall monthly income and debt, and credit rating are weighed when you apply for a new credit account. Standards and guidelines vary, most lenders like to see a DTI below 35─36% but some mortgage lenders allow up to 43─45% DTI, with some FHA-insured loans allowing a 50% DTI.
The current ratio shows a company's ability to meet its short-term obligations. The ratio is calculated by dividing current assets by current liabilities. An asset is considered current if it can be converted into cash within a year or less, while current liabilities are obligations expected to be paid within one year.
The Efficiency Ratio for Banks Is:
Since a bank's operating expenses are in the numerator and its revenue is in the denominator, a lower efficiency ratio means that a bank is operating better. An efficiency ratio of 50% or under is considered optimal.
- Capital adequacy ratio (CAR) It is the measure of a bank's available capital divided by the loans (assessed in terms of their risk) given by the bank. ...
- Gross and net non-performing assets. ...
- Provision coverage ratio. ...
- Return on assets. ...
- CASA ratio. ...
- Net interest margin. ...
- Cost to income.
Return on equity ratio
This is one of the most important financial ratios for calculating profit, looking at a company's net earnings minus dividends and dividing this figure by shareholders equity. The result tells you about a company's overall profitability, and can also be referred to as return on net worth.
Ratios include the working capital ratio, the quick ratio, earnings per share (EPS), price-earnings (P/E), debt-to-equity, and return on equity (ROE). Most ratios are best used in combination with others rather than singly to accomplish a comprehensive picture of a company's financial health.
A lower efficiency ratio signals that a bank is operating well. Efficiency ratios at 50% or below are considered ideal. If an efficiency ratio starts to go up, then it indicates that a bank's expenses are increasing in comparison to its revenues or that its revenues are decreasing in comparison to its expenses.
What is the average bank industry ratio?
Well, the banking sector as a whole had a P/E ratio of approximately 13.50 and compares with an overall market average P/E ratio of 36.7.
You simply take the bank's operating costs (this includes administrative and fixed costs, such as salaries and property expenses, but not bad debts that have been written off, for example). You then divide this number by the company's operating income (which is simply turnover minus operating costs).
- Net Interest Margin = (Interest Income – Interest Expense) / Total Assets.
- Efficiency Ratio = Non-Interest Expense / Revenue.
- Operating Leverage = Growth Rate of Revenue – Growth Rate of Non-Interest Expense.
- Liquidity Coverage Ratio = High-Quality Liquid Asset Amount / Total Net Cash Flow Amount.
Generally speaking, a good quick ratio is anything above 1 or 1:1. A ratio of 1:1 would mean the company has the same amount of liquid assets as current liabilities. A higher ratio indicates the company could pay off current liabilities several times over.
| Bank Of America Current Ratio Historical Data | ||
|---|---|---|
| Date | Current Assets | Current Ratio |
| 2020-03-31 | $1,870.08B | 0.92 |
| 2019-12-31 | $1,712.20B | 0.91 |
| 2019-09-30 | $1,725.78B | 0.92 |
A healthy current ratio is between 1.2 and 2, indicating that the company has twice as many current assets as liabilities to cover its debts. A current ratio of less than one will indicate that the company lacks sufficient liquid assets to satisfy its short-term liabilities.
Since non-interest expenses are a major component of a bank's overall expenses, they are considered bank overheads and are used to calculate the overhead ratio. The overhead ratio is calculated by dividing non-interest expense by the average assets.
A bank's leverage ratio is calculated by dividing its Tier 1 capital by its total leverage ratio exposure measure, which includes its assets and off-balance-sheet items, irrespective of how risky they are.
The Efficiency Ratio is a risk measure used to evaluate the cost-efficiency and profitability of a bank. The operating efficiency of a bank represents its ability to generate revenue – namely the net interest income from its interest-bearing assets in its loan portfolio – relative to its non-interest operating costs.
Bank managers and bank analysts generally evaluate overall bank profitability in terms of return on equity (ROE) and return on assets (ROA). When a bank consistently reports a higher than average ROE and ROA, it is designated a high performance bank.
What is a ratio analysis in banking?
Ratio analysis compares line-item data from a company's financial statements to reveal insights regarding profitability, liquidity, operational efficiency, and solvency. Ratio analysis can mark how a company is performing over time, while comparing a company to another within the same industry or sector.
- Tip 1: Categorize the Ratios. To keep in mind the formulas of the ratio, categorization works well. ...
- Tip 2: Writing Down Each Ratio and Start Working on them. ...
- Tip 3: Understanding. ...
- Tip 4: Use Pictures.
- Net profit margin = net income divided by sales.
- Return on total assets = net income divided by assets.
- Basic earning power = EBIT divided by total assets.
- Return on equity = net income divided by common equity.
Gross profit margin, also known as gross margin, is one of the most widely used profitability ratios. Gross profit is the difference between sales revenue and the costs related to the products sold, the aforementioned COGS.
Current Account Savings Account or CASA Ratio is the ratio of the deposits across current and savings accounts to the total deposits of the bank. Net Interest Margin or NIM Ratio is the difference between the interest earned by a bank on loans as opposed to the interest paid on deposits.
