Banking Ratios Cheat Sheet
Profitability Ratios
| Ratio | Formula | Good Benchmark | What It Tells You |
|---|---|---|---|
| Net Interest Margin (NIM) | (Interest Income – Interest Expense) ÷ Average Earning Assets | 2.5% – 3.5% | Core lending profitability |
| Return on Assets (ROA) | Net Income ÷ Average Total Assets | 1.0% – 1.5% | How efficiently assets generate profit |
| Return on Equity (ROE) | Net Income ÷ Average Shareholders’ Equity | 10% – 15% | Return to shareholders |
| Return on Tangible Common Equity (ROTCE) | Net Income ÷ Avg Tangible Common Equity | 12% – 18% | Excludes goodwill, better for acquisitive banks |
| Efficiency Ratio | Non-Interest Expense ÷ Total Revenue | 50% – 60% | Cost control — lower is better |
| Pre-Provision Net Revenue (PPNR) / Assets | Revenue less expenses before provisions ÷ Assets | 1.5% – 2.5% | Earnings power before credit losses |
Asset Quality Ratios
| Ratio | Formula | Good Benchmark | What It Tells You |
|---|---|---|---|
| Non-Performing Loan (NPL) Ratio | Non-Performing Loans ÷ Total Loans | < 1.0% | Credit quality of loan portfolio |
| Net Charge-Off (NCO) Ratio | Net Charge-Offs ÷ Average Loans | < 0.5% | Actual credit losses realized |
| Provision / Average Loans | Loan Loss Provision ÷ Average Loans | 0.2% – 0.5% | Forward-looking credit cost estimate |
| Allowance / NPL (Coverage Ratio) | Loan Loss Allowance ÷ Non-Performing Loans | > 100% | Reserve adequacy — higher means better cushion |
| Loan-to-Deposit Ratio | Total Loans ÷ Total Deposits | 70% – 90% | Balance between lending and funding |
Capital Adequacy Ratios
| Ratio | Formula | Regulatory Minimum | Well-Capitalized |
|---|---|---|---|
| CET1 Ratio | Common Equity Tier 1 ÷ Risk-Weighted Assets | 4.5% | > 6.5% |
| Tier 1 Capital Ratio | Tier 1 Capital ÷ Risk-Weighted Assets | 6.0% | > 8.0% |
| Total Capital Ratio | Total Capital ÷ Risk-Weighted Assets | 8.0% | > 10.0% |
| Leverage Ratio | Tier 1 Capital ÷ Average Total Assets | 4.0% | > 5.0% |
| Tangible Common Equity (TCE) Ratio | TCE ÷ Tangible Assets | N/A (market metric) | > 7.0% |
For a deeper dive into regulatory frameworks including Basel III and stress testing, see the regulatory capital requirements cheat sheet.
Valuation Ratios for Banks
| Ratio | Formula | Typical Range | Use Case |
|---|---|---|---|
| Price / Tangible Book Value (P/TBV) | Stock Price ÷ TBV per Share | 1.0x – 2.0x | Primary bank valuation metric |
| Price / Book Value | Stock Price ÷ Book Value per Share | 0.8x – 1.8x | Includes goodwill, less clean |
| P/E Ratio | Stock Price ÷ EPS | 8x – 14x | Earnings-based valuation |
| Dividend Yield | Dividend per Share ÷ Stock Price | 2% – 4% | Income return to shareholders |
Key Takeaways
- NIM is the core profitability driver — it measures the spread banks earn between deposits and loans.
- Efficiency ratio below 60% indicates strong cost discipline; above 70% signals problems.
- NPL ratio and NCO ratio are the key credit quality metrics — watch for trends, not just levels.
- CET1 ratio must exceed regulatory minimums; most large banks target 10%+ with buffers.
- P/TBV (not EV/EBITDA) is the primary valuation metric for bank stocks.
FAQ
Why can’t you use EV/EBITDA to value banks?
Banks don’t have a meaningful distinction between operating and financing activities — debt (deposits) IS the business. Enterprise value and EBITDA aren’t useful concepts for banks. Use P/E, P/TBV, and dividend yield instead.
What is a good ROA for a bank?
An ROA of 1.0%–1.5% is considered strong for a bank. This may seem low compared to other industries, but banks operate with extremely high leverage (10–12x assets/equity), so a small ROA translates to a solid ROE of 10–15%.
What does the efficiency ratio measure?
The efficiency ratio measures operating costs as a percentage of revenue. A 55% efficiency ratio means the bank spends $0.55 to generate every $1 of revenue. Lower is better. Top-performing banks achieve ratios below 50%.
What is the difference between CET1 and Tier 1 capital?
CET1 (Common Equity Tier 1) is the highest quality capital: common stock and retained earnings. Tier 1 also includes preferred stock and other qualifying instruments. CET1 is the binding constraint for most banks under Basel III rules.
Why is tangible book value more important than book value for banks?
Tangible book value excludes goodwill and intangible assets, which can’t absorb losses. For banks that have made acquisitions, book value can be inflated by goodwill. TBV gives a cleaner picture of the actual equity cushion available to absorb losses.