Business, Legal & Accounting Glossary
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 big. It is related to operating leverage, which measures the ratio between fixed costs and variable costs.
If expenses are $40 and revenue is $80 (perhaps net of interest revenue/expense) the efficiency ratio is 0.5 or 50% (40/80). The 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, 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%.
If “benefits, claims, and credit losses” is added to operating expenses the ratio gets worse.
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.
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This glossary post was last updated: 18th April, 2020 | 1 Views.