# How to Calculate Profitability Ratios for Banks

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In an economy that is ever-fluctuating, investors want to know that their money is safe. Since some banks have performed financial belly-flops, you may want to investigate a bank's profitability before you place your money in their care. Three primary measures of bank profitability are known as the "Return on Assets" (ROA) , "Return on Equity" (ROE) and the "Net Interest Margin" (NIM). Ratios are comparisons of various quantities. Use these formulas to determine the profitability ratio of a bank.

## Return on Assets

Calculate the bank's net income. This is its total income (or "gross" income) minus its expenses such as provision for loan losses and non-interest expenses. For instance, if a bank has a gross income of \$50 million and expenses totaling \$8 million, you would subtract \$8 million from \$50 million to get a net income of \$42 million.

Add the bank's assets, such as loans, securities and cash. For this example, assume that the bank has assets totaling \$75 million.

Divide the bank's net income by its assets to find the Return on Assets. This is the ratio that you are comparing. In this example, you would divide \$42 million by \$75 million to get 0.56. To state this as a percent, multiply times 100, to equal 56 percent.

## Return on Equity

Subtract the bank's expenses from its gross income to find the net income.

Divide the bank's net income by its capital. A bank's capital consists of items including the equity of shareholders, reserves and retained earnings. Consider an example in which a bank has \$100 million in net income and \$800 million in capital. Divide \$100 million by \$800 million to get 0.125.

Convert the ratio of income to assets to a percentage by multiplying your answer from step two times 100. In this example, you would multiply 0.125 times 100 to get 12.5 percent.

## Net Interest Margin

Subtract the bank's interest expenses from its interest income. Consider an example in which a bank has \$500,000 in interest income and \$50,000 in interest expenses. Subtract 50,000 from 500,000 to get \$450,000.

Divide your answer from Step 1 by the bank's assets. If the bank in this example has assets totaling \$700,000, you would divide \$450,000 by \$700,000 to get 0.643.

Multiply the decimal form of this ratio by 100 to get the answer as a percentage. In this example, you would multiply 0.643 times 100 to get 64.3 percent.