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How Can You Help Improve Your Financial Institution’s Efficiency Ratio?

March 14, 2012

By Jim Yancey, Executive Vice President 

The efficiency ratio is a useful tool in determining how efficient a bank or credit union is generating revenue. There are many different ways to calculate the number, but typically it is stated as the ratio of general and administrative expense (overhead) as a percentage of fully taxable equivalent revenue. The lower the number the more efficient the financial institution operates.

Another way to explain this ratio is, on average what did it cost the institution for generating one dollar of revenue? So for an institution with a 55% efficiency ratio, it cost them 55 cents for each dollar of revenue generated. So, the more overhead in terms of labor cost, occupancy, and other expense—the higher your efficiency ratio.

Why should we care about the efficiency ratio? Well for one, many groups such as investors, regulators and even some account holders use this measurement to determine the institution’s value, competitiveness and their viability. While it is only one measurement, it is considered by many to be an important performance measurement that influences critical business activities, such as becoming a customer or member, being acquired or for regulators to limit certain practices.

What size institutions were more efficient during 2011? A recent analysis by Fred Brother at FIS illustrates that larger financial institutions had a significant advantage over smaller ones in terms of overall efficiency. As a rule, larger institutions are able to justify the cost of acquiring efficient technology, which in turn helps by reducing their overhead and especially their personnel cost.

So if your institution is $10B in assets or smaller, how can you help your institution become more efficient? Since personnel expense typically represents the largest portion of overhead, usually 50-60% of your total overhead expense, implementing efficiency technology solutions can go a long way in optimizing your personnel expense.  This type of investment can lower your institution’s overhead, which subsequently improves your institution’s overall efficiency ratio.

FMSI has been in the business providing branch performance management and labor cost optimization technology solutions since 1990. Over FMSI’s history, our solutions have produced significant client bottom line results, which has improved their overall efficiency and favorably impacted their efficiency ratio number.

If you would like to learn more about FMSI’s performance improvement solutions, call Gordon A. Williams, IV, EVP Business Development at877.887.3022 (Toll Free).

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