LIQUIDITY RATIO

Loan to Deposit Ratio:

Advances to deposits Total Advances

=
ratio Total Deposits

The loan-to-deposit ratio (LDR) is used to assess a bank's ability to cover loan losses.
Investors monitor the LDR of banks to make sure there's adequate liquidity to cover loans in
the event of an economic downturn resulting in loan defaults.
Too high: the bank may not have enough liquidity to cover any unforeseen fund
requirements.
Too low: the bank may not be earning as much as it could be.
If bank deposits are increasing, it means new clients are coming, as a result more money to
lend… contrary if deposits are decreasing

Advances to total asset ratio:

Advances to Total Asset Total Deposits

=
ratio Total Assets

Total-debt-to-total-assets is a measure of the company's assets that are financed by debt

rather than equity.
Investors: evaluate whether the company has enough funds to meet its current debt
obligations and to assess whether the company can pay a return on its investment.
Creditors: evaluate how much debt the company already has and whether the company can
repay its existing debt. This will determine whether additional loans will be extended to the
firm.
x>1: greater portion of the debt is funded by assets.
x<1: a greater portion of a company's assets is funded by equity.

Cash Ratio:

Cash and Its equivalents

Cash ratio =
Total Assets

A cash ratio determines how much credit can be created from deposits. It also determines
the profitability of a bank. If cash ratios are higher then, banks will be less profitable.
However, higher cash ratios do enable greater security.
x<1: more current liabilities than cash and cash equivalents. It means insufficient cash on
hand exists to pay off short-term debt.
x>1: the company has more cash and cash equivalents than current liabilities. In this
situation, the company has the ability to cover all short-term debt and still have cash
remaining
Cash Reserve Ratio

Reserve Requirement *
Cash Reserve Ratio =
Bank Deposits

The cash reserve ratio denotes the proportion of overall deposits that a bank is required to
retain with the central bank of the country.
A bank is mandated to maintain the CRR to avert any shortage of funds during instances of
bank run. Inherently, the central banks use the CRR as a means to manage liquidity in the
economy by controlling the money supply.
Cash deposit to be maintained with RBI by a bank increases with increase in CRR. When
CRR is increased, then the banks would not have more money at their disposal to sanction
loans.
When the Federal Reserve decreases the reserve ratio, it lowers the amount of cash that
banks are required to hold in reserves, allowing them to make more loans to consumers and
businesses. This increases the nation's money supply and expands the economy.

Liquidity Coverage Ratio

Liquidity Coverage Total Liquid Assets

=
Ratio Total Net cash flow

The liquidity coverage ratio (LCR) refers to the proportion of highly liquid assets held by
financial institutions, to ensure their ongoing ability to meet short-term obligations.
The standard requires that, absent a situation of financial stress, the value of the ratio be no
lower than 100%

EFFICIENCY RATIOS:
Asset utilization:

Total Operating Income

Asset Utilization Ratio =
Total Assets
 An optimal asset utilization ratio means the company is being more efficient with each dollar
of assets held. The asset utilization ratio calculates the total revenue earned for every dollar
of assets a bank owns. An increasing asset utilization means the bank is being more
efficient with each dollar of assets it has. 
Overhead Efficiency:

Non-Interest Income
Overhead Efficiency =
Non-Interest Expense

For a bank, an efficiency ratio is an easy way to measure the ability to turn assets into
revenue.
Since a bank's operating expenses are in the numerator and its revenue is in the
denominator, a lower efficiency ratio means that a bank is operating better. An efficiency
ratio of 50% or under is considered optimal. If the efficiency ratio increases, it means a
bank's expenses are increasing or its revenues are decreasing.

Income efficiency ratio

Non-Interest Expense
Income efficiency ratio =
Net Income

The efficiency ratio is typically used to analyze how well a company uses its assets and
liabilities internally. An efficiency ratio can calculate the turnover of receivables, the
repayment of liabilities, the quantity and usage of equity, and the general use of inventory
and machinery. This ratio can also be used to track and analyze the performance of
commercial and investment banks.
An efficiency ratio of 50% or under is considered optimal. If the efficiency ratio increases, it
means a bank's expenses are increasing or its revenues are decreasing.
Capital Adequacy Ratio

Capital Adequacy Ratio =

The capital adequacy ratio (CAR) is a measurement of a bank's available capital expressed
as a percentage of a bank's risk-weighted credit exposures. The capital adequacy ratio, also
known as capital-to-risk weighted assets ratio (CRAR), is used to protect depositors and
promote the stability and efficiency of financial systems around the world.
When this ratio is high, it indicates that a bank has an adequate amount of capital to deal
with unexpected losses.
When the ratio is low, a bank is at a higher risk of failure, and so may be required by the
regulatory authorities to add more capital.

The Capital Adequacy Ratio , also known as capital to Risk-Weighted Assets Ratio, measures a bank's
financial strength by using its capital and assets. It is used to protect depositors and promote the
stability and efficiency of financial systems around the world. Generally, a bank with a high Capital
Adequacy Ratio is considered safe and likely to meet its financial obligations. The Capital Adequacy Ratio
is calculated by dividing a bank's capital by its risk-weighted assets. The capital used to calculate the
capital adequacy ratio is divided into two tiers. Tier-One Capital, or Core Capital, is comprised of Equity
Capital, Ordinary Share Capital, Intangible Assets and Audited Revenue Reserves. Tier-One Capital is
used to absorb losses and does not require a bank to cease operations. Tier Two Capital comprises
Unaudited Retained Earnings, Unaudited Reserves and General Loss Reserves. This capital absorbs losses
in the event of a company winding up or liquidating. The two capital tiers are added together and
divided by risk-weighted assets to calculate a bank's capital adequacy ratio. Risk-weighted assets are
calculated by looking at a bank's loans, evaluating the risk and then assigned a weight. Currently, the
minimum ratio of capital to risk-weighted assets is eight percent under Basel II and 10.5 percent under
Basel III. High capital adequacy ratios are above the minimum requirements under Basel II and Basel III.
Minimum capital adequacy ratios are critical in ensuring that banks have enough cushion to absorb a
reasonable amount of losses before they become insolvent and consequently lose depositors’ funds
(Brian, 2018).

LEVERAGE/SOLVENCY RATIOS
Leverage Ratio

Return on Asset
Leverage Ratio =
Return on Equity

This ratio assesses the ability of a company to meet its financial obligations. 
Debt to Equity ratio

Total Debt
Debt to Equity ratio =
Total Equity

The ratio is used to evaluate a company's financial leverage. The D/E ratio is an important
metric used in corporate finance. It is a measure of the degree to which a company is
financing its operations through debt versus wholly-owned funds. More specifically, it
reflects the ability of shareholder equity to cover all outstanding debts in the event of a
business downturn.
A lower debt to equity ratio usually implies a more financially stable business. Companies
with a higher debt to equity ratio are considered more risky to creditors and investors than
companies with a lower ratio. Unlike equity financing, debt must be repaid to the lender.
Interest Coverage Ratios

EBIT
Interest Coverage Ratio =
Interest Expense

A coverage ratio, broadly, is a group of measures of a company's ability to service its debt
and meet its financial obligations such as interest payments or dividends.
When a company's interest coverage ratio is only 1.5 or lower, its ability to meet interest
expenses may be questionable. An interest coverage ratio below 1.0 indicates the business
is having difficulties generating the cash necessary to pay its interest obligations (i.e.
interest payments exceed its earnings (EBIT)).

A higher ratio indicates a better financial health as it means that the company is more
capable to meeting its interest obligations from operating earnings. On the other hand, a
high ICR may suggest a company is "too safe" and is neglecting opportunities to magnify
earnings through leverage.

PROFITABILITY RATIOS:

Return on asset:

Net Income
Return on Asset =
Total Assets

The ROA figure gives investors an idea of how effective the company is in converting the
money it invests into net income. The higher the ROA number, the better, because the
company is earning more money on less investment.

Return on equity:

Net Income
Return on Equity =
Equity Capital

The return on equity (ROE) metric reveals how effectively a corporation is generating profit
from the money that investors have put into the business.
x>18% is best

Equity multiplier:

Assets
Equity Multiplier =
Equity Capital

The equity multiplier is a financial leverage ratio that measures the amount of a firm’s assets
that are financed by its shareholders by comparing total assets with total shareholder’s
equity.
The equity multiplier is an indication of company risk to creditors.
A higher ratio means that more assets were funding by debt than by equity. 
Lower multiplier ratios are always considered more conservative and more favorable than
higher ratios because companies with lower ratios are less dependent on debt financing and
don’t have high debt servicing costs.
Net interest margin:

Interest Income from Loans and Investments - Interest

Net Interest
= Expense on Deposits and other Borrowed Funds
Margin
Investment Securities + Net Loans and Leases

Net interest margin (NIM) reveals the amount of money that a bank is earning in interest on
loans compared to the amount it is paying in interest on deposits. In short, net interest
margin is one indicator of a bank's profitability and growth. It reveals how much the bank is
earning in interest on its loans compared to how much it is paying out in interest on
deposits.

Non-Interest Income – Non-Interest Expense

Net Non-Interest Margin =
Total Assets

Spread:

Interest Income Interest Expense

Spread = -
Earning Assets Interest Bearing Liabilities

The net interest rate spread is the difference between the interest rate a bank pays to
depositors and the interest rate it receives from loans to consumers. The primary business
of a bank is managing the spread between the interest rate on deposits that it pays
consumers and the rate it receives from their loans. In other words, when the interest that a
bank earns from loans is greater than the interest it pays on deposits, it generates income
from the interest rate spread.

Profit Margin
Net profit margin

Net Income after Tax

Net Profit Margin =
Operating Income

It is the percentage of revenue left after all expenses have been deducted from sales. The
measurement reveals the amount of profit that a business can extract from its total sales.
The net profit margin is intended to be a measure of the overall success of a business. A
high net profit margin indicates that a business is pricing its products correctly and is
exercising good cost control
A higher net profit margin means that a company is more efficient at converting sales into
actual profit.
A low net profit margin means that a company uses an ineffective cost structure and/or poor
pricing strategies. Therefore, a low ratio can result from: Inefficient management.

Interest Expense Ratio:

Interest Expense
Interest Expense Ratio =
Total Operating Income

The interest coverage ratio is used to determine how easily a company can pay its interest
expenses on outstanding debt.

Provision for loan loss ratio:

Provision for Loan Loss Provision for Loan Losses

=
Ratio Total Operating Income

many banks lend to risky borrowers by charging high interest rates. To stabilize earnings
and remain solvent in bad times, banks estimate losses and seek to hold enough capital to
absorb future write-offs.
The loan loss provision coverage ratio is an indicator of how protected a bank is against
future losses. A higher ratio means the bank can withstand future losses better, including
unexpected losses beyond the loan loss provision.

Non-interest expense ratio:

Non-Interest Expense Non-Interest Expense

=
Ratio Total Operating Income

A noninterest expense is an operating expense of a bank or financial institution that is

classified separately from interest expense and provision for credit losses. E.g. Employee
salaries, bonuses, and benefits, Equipment rental or leasing etc. Noninterest expenses are
typically higher for investment banks than commercial banks because trading, asset
management, and capital markets advisory services are costly.

Tax ratio:

Income Tax
Tax Ratio =
Total Operating Income
The effects are heterogeneous across banks, depending on the financial strength of
the banks. Strong banks use the reduction in tax rates to increase their assets, notably the
investment portfolio. Weak banks, however, use the change in tax rates to clean up their
balance sheets.

Net Stable Funding Ratio

Bank’s Available Stable

Net Stable Funding
= Funding
Ratio
Required Stable Funding

The Net Stable Funding Ratio (NSFR) - aims to promote resilience over a longer time
horizon by creating incentives for banks to fund their activities with more stable sources of
funding on an ongoing basis.
The NSFR is expressed as a ratio that must equal or exceed 100%.