THE LINK BETWEEN THE BANK EFFICIENCY RATIO AND NIM

A current example of the attention paid to the Efficiency Ratio is occurring at Zion’s Bancorporation. Moody’s (2017) reports that the BHC is expected to achieve its Efficiency Ratio target for 2016 of below 66%, which is credit positive for the Baa3 rated lender. A further reduction in the Efficiency Ratio is expected to the low 60’s as healthcare costs and other expense streamlining processes such as charter consolidation occur over the next several years. Moody’s (2017) reports that certain BHCs have poorer Efficiency Rates above the 70s, while more efficient BHCs like BB&T Corp and US Bancorp report Efficiency Ratios approaching the upper 50s.

The Moody's report, found in its weekly Credit Outlook series, indicate that recent actions taken by Zions Bancorporation are credit positive on the back of decisions to cut executive pay in order to achieve this ratio.  An interesting link emerges from this information. Moody's reports that as Zions expects other expenses to grow 2-3 per cent in 2017, thus achieving further Efficiency Ratio gains will need to come from maintaining revenue growth, which is largely NIM generated.  Thus, growing Net Interest Income and Total Interest Income with higher interest rates likely this year may help the lender to achieve this further goal. 

Source: Moody’s. (2017) Zions’ Credit Positive Executive Pay Cut Allows Bank to Meet its Efficiency Target. Moody’s Credit Outlook: Credit Implications of Current Events,  30 January 2017,  p.  13.