A loan is impaired when it is not likely the lender will collect the full value of the loan because the creditworthiness of a borrower has fallen.
Loan/Deposit Ratio
The loan/deposit ratio helps assess a bank's liquidity, and by extension, the aggressiveness of the bank's management. If the loan/deposit ratio is too high, the bank could be vulnerable to any sudden adverse changes in its deposit base. Conversely, if the loan/deposit ratio is too low, the bank is holding on to unproductive capital and earning less than it should.
Efficiency Ratio
A bank's efficiency ratio is essentially equivalent to a regular company's operating margin, in that it measures how much the bank pays on operating expenses, like marketing and salaries. By and large, lower is better.
Capital Ratios
There are a host of ratios that bank regulators and investors use to assess how risky a bank's balance sheet is, and the degree to which the bank is vulnerable to an unexpected increase in bad loans. A bank's Tier 1 capital ratio takes a bank's equity capital and disclosed reserves and divides it by the bank's risk-weighted assets, (assets whose value is reduced by certain statutory amounts, based upon its perceived riskiness).
The capital adequacy ratio is the sum of Tier 1 and Tier 2 capital, divided by the sum of risk-weighted assets. The tangible equity ratio takes the bank's equity, subtracts intangible assets, goodwill and preferred stock equity, and then divides it by the bank's tangible assets. Although not an especially popular ratio prior to the 2007/2008 credit crisis, it does offer a good measure of the degree of loss a bank can withstand, before wiping out shareholder equity.
Capital ratios can be thought of as proxies for a bank's margin of error. Nowadays, capital ratios also play a larger role in determining whether regulators will sign off on acquisitions and dividend payments.
Capital Adequacy Ratio (CAR) is also known as Capital to Risk (Weighted) Assets Ratio(CRAR),[1] is the ratio of a bank's capital to its risk. National regulatorstrack a bank's CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory Capital requirements.
It is a measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures.
This ratio is used to protect depositors and promote stability and efficiency of financial systems around the world.
Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
Net Interest Margin
Net interest margin (NIM) A bank’s main source of income is the difference between the interest received from the customers it has made loans to and the amount it pays its depositors and other providers of debt funding. This is known as the ‘net interest margin’ and is typically expressed as a percentage of the average loans (or ‘interest earning assets’) outstanding over the period in question. While not part of the official financial statements, most banks disclose this average somewhere near the front of their detailed annual reports.
Cost to Income Ratio (CIR)
Cost-to-income ratio Taking the net interest income and adding the non-interest income (aka ‘fees’), we arrive at a bank’s total income (though, in practice, there are often a few ‘other’ items to account for). The cost-to-income ratio (or ‘efficiency ratio’) takes the bank’s operating expenses as a percentage of its total income. The lower, the better.
Bad Debt
Charging fees and receiving interest is all in a day’s work for the average banker. But things occasionally turn ugly when a client can’t meet their repayments and a debt goes bad. And when you’re dealing with a net interest margin of less than 2%, it doesn’t take many bad loans to wipe out a hefty chunk of your profit.
Reference:
http://www.modefinance.com/blog/en/2015-12-23-How-To-Evaluate-Bank-Creditworthiness
https://www.moodys.com/sites/products/ProductAttachments/Banking%20Account%20and%20Ratio%20Definitions.pdf
https://www.sapling.com/13400715/you-can-buy-a-home-and-have-avocado-toast-too
http://www.investopedia.com/university/banking-system/banking-system9.asp
https://www.fool.com/knowledge-center/how-to-calculate-profitability-ratios-for-banks.aspx
http://www.dummies.com/business/accounting/how-companies-use-the-loan-loss-coverage-ratio/
https://en.wikipedia.org/wiki/Capital_adequacy_ratio
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