Learning Objectives:

  • Apply key profitability metrics: ROE, ROA, and NIM.

  • Apply efficiency and liquidity metrics.

  • Evaluate bank performance using these metrics.

7.1 Profitability Metrics

  • Return on Equity (ROE): Net income divided by shareholders’ equity. A primary measure of shareholder return. The Jazan University course identifies “banking sector profitability indicators” as a core learning outcome .

  • Return on Assets (ROA): Net income divided by total assets. Measures how efficiently the bank uses its assets to generate profit.

  • Net Interest Margin (NIM): NII divided by average earning assets. Measures the profitability of the bank’s core lending and deposit-taking activities.

The Siena University course covers “profitability threshold, risk threshold and conditions of capital adequacy” as core topics .

7.2 Efficiency Metrics

  • Efficiency Ratio: Non-interest expenses divided by revenue. A lower ratio indicates a more efficient bank. The ratio of operating costs to revenue is a key performance metric.

  • Cost-to-Income Ratio: A variation of the efficiency ratio, measuring costs relative to income.

7.3 Liquidity Metrics

  • Loan-to-Deposit Ratio: Total loans divided by total deposits. A higher ratio indicates the bank is using more of its deposits for lending.

  • Liquidity Coverage Ratio (LCR): High-quality liquid assets divided by total net cash outflows over 30 days. Requires a minimum of 100%.

  • Net Stable Funding Ratio (NSFR): Available stable funding divided by required stable funding. Requires a minimum of 100%.

7.4 Performance Evaluation Frameworks

The University of Aberdeen course requires students to “explain how we measure bank performance and the nature of risks faced by banks” . The Siena University course covers “bank financial analysis: key analysis metrics” . The William Paterson University course covers “profit drivers in banking” . The ABA’s “Analyzing Financial Statements” course provides practical training in these analysis techniques .

PreviousNext