Bank economics
Bank performance ratios
Cost-to-income, ROA, ROE, cost of risk and the loan-to-deposit ratio — calculated and read together.
18 minintermediateMembers
Learning objectives
- Calculate cost-to-income, ROA, ROE, cost of risk and the loan-to-deposit ratio
- Link ROE to ROA and leverage
- Interpret what a high ROE or a high loan-to-deposit ratio does and does not tell you
Bank analysts, rating teams and investors summarise a bank with a handful of ratios. Each answers one question: how efficient is it, how profitable on its assets and on its equity, how costly is its credit, and how far does its lending rely on deposits? Read together they show how a bank earns its return — and what could break it.
Cost/income = Opex ÷ Operating income ROA = NI ÷ Avg assets ROE = NI ÷ Avg equity = ROA × (Avg assets ÷ Avg equity) LDR = Loans ÷ Customer deposits
- Opex
- operating expenses (before impairment)
- Operating income
- NII + fees + other income
- NI
- net income after zakat and tax
- Avg
- (opening + closing) ÷ 2 — flows over stocks use average balances
- LDR
- loan-to-deposit ratio, net loans ÷ customer deposits, at period-end
- Cost of risk
- impairment charge ÷ average loans
Included with a Formula Quest membership
The rest of this lesson is for members. Members get the full lesson, including its 3 graded exercises, and every other Finance Quest lesson.