How to Calculate Profitability Ratios for Banks

by Charlotte Johnson ; Updated April 19, 2017

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

Step 1

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.

Step 2

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

Step 3

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

Step 1

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

Step 2

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.

Step 3

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

Step 1

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.

Step 2

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.

Step 3

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.

About the Author

Charlotte Johnson is a musician, teacher and writer with a master's degree in education. She has contributed to a variety of websites, specializing in health, education, the arts, home and garden, animals and parenting.