The efficiency ratio, a ratio that is typically applied to banks, in simple terms is defined as expenses as a percentage of revenue (expenses / revenue), with a few variations. A lower percentage is better since that means expenses are low and earnings are high. It is related to operating leverage, which measures the ratio between fixed costs and variable costs.
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Example
If expenses are $40 and revenue is $80 (perhaps net of interest revenue/expense) the efficiency ratio is 0.5 or 50% (40/80). Efficiency ratio is essentially how much you spend to make a dollar. In the above example, they spent $0.50 for every dollar they earned in revenue.
Citigroup
Citigroup, Inc. 2003:
- Revenues, net of interest expense: 77,442
- Operating expenses: 39,168
That makes operating expenses / revenue = 39,168/77,442 = 0.51 or 51%. The efficiency ratio is 0.51 or 51%.
Alternative
If "benefits, claims, and credit losses" are added to operating expenses the ratio gets worse.
51109/77,442=0.66
Alternative
If it's calculated as revenue divided by expenses (interest expense, "benefits, claims, and credit losses", operating expenses) it becomes 1 less the "income from continuing operations" margin.
68,380/94,713=0.72
See also
- Business margin
- Financial market efficiency
- Operating leverage
- Sortino ratio
- Business process reengineering
External links
Example
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