What Is Efficiency Ratio?

The efficiency ratio measures what share of its revenue a bank consumes in operating costs — salaries, occupancy, technology, compliance, and other non-interest expenses. It is calculated by dividing non-interest expense by total revenue (net interest income plus non-interest income). A lower ratio is better: it means the bank keeps more of each dollar of revenue as profit.

An efficiency ratio below 50% is considered excellent — the bank converts more than half of its revenue into pre-provision profit. Ratios between 50% and 60% are good. Ratios between 60% and 70% are average. Ratios above 70% indicate the bank is spending too much to generate its revenue, leaving thin margins for building capital reserves.

Large banks have invested heavily in technology and digital banking, which has helped some achieve efficiency ratios below 55%. Community banks often have higher efficiency ratios (60-70%) because they maintain branch networks and relationship-based service models that are inherently more labor-intensive. However, community banks with efficiency ratios above 80% may be struggling to cover their operating costs and build capital.

For depositors, the efficiency ratio is an indirect but meaningful indicator of long-term bank health. An inefficient bank must either charge higher loan rates, pay lower deposit rates, or generate thinner profits — any of which can affect the bank's competitive position and financial resilience over time. While the BankHealthData score does not directly include the efficiency ratio, its effect flows through the return on assets component: a bank with a high efficiency ratio will tend to show a lower ROA, which reduces its Health Score.