# Bank Info Blog.

## Efficiency Ratio

### Bank and Credit Union Metrics

Efficiency Ratio: What it is, how it’s calculated and why it’s important to banks and credit unions.

Calculation

Efficiency Ratio: [Annualized(Total Noninterest Expense - Amortization Expense And Impairment Losses For Other Intangible Assets)] / [Annualized(Net Interest Income + Total Noninterest Income)]

Definition

The Efficiency Ratio is used to compare how much a bank is making to how much they are spending in a given time period. There are many definitions of an Efficiency Ratio, but the FDIC recognizes an Efficiency Ratio to be a measure of the bank’s ability to create revenue from their non-funding related expense base. The ratio tells you how well a bank is using their assets to generate profits. The Efficiency Ratio is calculated by dividing the bank’s Noninterest Expenses by their Net Income.

How it’s used

Banks strive for lower Efficiency Ratios since a lower Efficiency Ratio indicates that the bank is earning more than it is spending. This benefits both the bank as well as the bank’s shareholders. A general rule of thumb is that 50 percent is the maximum optimal Efficiency Ratio. Any ratio above 50 percent indicates that the bank is spending more than half of what it is earning in Net Income on Noninterest Expense.

Often, a bank with a low Efficiency Ratio is strong in profitability. This makes sense when you consider a lower Efficiency Ratio means that the bank is spending less to make the same or more money. The more efficient a bank is, the more profit that it can make. This might bring up the question: Does that mean that the more cash and assets that a bank has, the better their efficiency is? This may seem like the case, but it doesn’t always hold true. By measure of the Efficiency Ratio, Smaller banks can perform just as well, if not better, than some larger banks that have a larger pool of assets.