How to calculate the efficiency ratio

A bank's efficiency ratio is noninterest expense divided by total revenue, where revenue is net interest income plus noninterest income. Lower is better: a 55% ratio means the bank spends 55 cents to earn each dollar of revenue. Banks also report adjusted versions that remove one-time items, which is where comparisons start to break down.

Boards, analysts and acquirers compare efficiency ratios across banks, so small definitional choices get a lot of attention.

Why the efficiency ratio matters

1. It shows how much it costs to run the bank relative to what it earns.
2. Analysts use it to compare banks of different sizes.
3. Acquirers use it to estimate cost savings in a deal.

The gray area

1. Reported or adjusted? Which one-time items, such as merger costs or severance, come out of the adjusted ratio?
2. Amortization of intangibles. Often excluded after an acquisition. Is it in yours?
3. Securities gains and losses. Usually removed from revenue. Are they in yours?
4. Tax-equivalent revenue. Is net interest income grossed up to an FTE basis?
5. Other real estate owned costs. In or out?
6. Segment ratios. How are shared costs allocated to business lines?

Core principles

1. Report the unadjusted ratio alongside any adjusted one.
2. List every adjustment and keep the list stable from quarter to quarter.
3. Use the same net interest income as your NIM calculation, including the FTE choice.
4. Document allocation rules for segment efficiency ratios.

Calculating the efficiency ratio in one system

1. Pull noninterest expense for the period from the GL.
2. Pull net interest income and noninterest income from the GL.
3. Divide expense by the sum of the two income figures.
4. For the adjusted ratio, remove each listed item from expense or revenue and recalculate.

Calculating the efficiency ratio across systems

The GL holds the totals, but adjustments are usually tracked in spreadsheets, cost allocations in a planning tool and merger costs in a deal model. When each adjustment lives somewhere different, the adjusted ratio can't be rebuilt next quarter. Keep each adjustment as a documented, owned rule mapped to its source.

How Preql helps

Preql maps how your GL, planning tool and spreadsheets define each expense and revenue line. Finance approves the reported and adjusted efficiency ratio definitions, with an owner, version history and lineage back to source, so every adjustment can be explained.

FAQ

What is a good efficiency ratio?

Lower is better, but it depends on the bank's size and business mix. Compare against peers that calculate it the same way.

Why does our ratio differ from the analyst's?

Usually because of different adjustments or a different tax-equivalent choice. Ask for their definition and reconcile item by item.

Related: How to calculate net interest margin (NIM)

Talk to our team

Want one approved definition of your efficiency ratio across your reports? Book a call with our team.

What happens next: in a 30-minute call, you'll see where your numbers stop matching and why.