In this workout, we need to use the information below to calculate the efficiency ratios for 2022, 2023, and 2024, and comment on the changes.

We've been presented with information on the net interest income, other income, so non-interest income, to give us total revenue. And then we've got non-interest expenses, and that information has been used to calculate the efficiency ratio.

We need to understand how that has been calculated, see if we agree with the calculations, so we will replicate that below. Before we do, we've been given additional information on the non-interest expense.

The non-interest expense has been broken down into the various elements. So looking at some of these, compensation and employee benefits, net occupancy and equipment costs, and you can run down the list and look at the others.

Important to note that we have got a total before non-recurring items.

We've then got some non-recurring expenses.

And at the bottom, if we add those non-recurring expenses to the total before the non-recurring expenses, we have the total non-interest expense or the total operating expenses.

Let's just double-check that that ties in with the extract we were looking at above, and we can see that those numbers agree.

So to calculate the efficiency ratio, or the cost-to-income ratio, as it's also called, we need to express the non-interest expense as a percentage of the revenue.

The numbers for net revenue have been extracted from above.

And so to calculate the efficiency ratio, we're going to express the total non-interest expense as a percentage of the net revenue. If we copy that to the right, we get the figures for all three years.

The ratio we have just calculated agrees with the numbers in the extract above.

Now, when we calculate the efficiency ratio, we should only be looking at the recurring operating expenses and recurring income. And we know there are some non-recurring expenses.

If we go back to that breakdown of expenses below, let's recalculate the efficiency ratio by only using the total expenses before non-recurring items and see what that looks like.

So the adjusted efficiency ratio, looking only at the recurring operating expenses, would be the $16,788 divided by the net revenue of $27,609, which gives us 60.8% for 2024. And if we copy that to the right, we get the figures for the other three years.

So what comment can we make on this? Firstly, just looking at the unadjusted efficiency ratio, going from 2022 to 2023, we can see that the efficiency ratio has increased. Now remember, an increase does not mean more efficient, it means less efficient. The non-interest expenses are a greater proportion of the revenue. So that's the first comment that we've got there. The movement in the efficiency ratio suggests the bank was less efficient in 2023 due to faster growth in non-interest expenses than growth in the net revenue.

We can see from 2023 to 2024, there has been an improvement.

However, we should actually be analyzing the adjusted efficiency ratio because that corrects for the non-recurring items.

And on that metric, we can see that things have remained relatively stable.

And this suggests that management have been able to effectively manage non-interest expenses as revenues have fluctuated.

Something to bear in mind, though, is we should try get some comfort that those non-recurring expenses are truly non-recurring in nature, because if they are likely to be recurring, we should actually then not exclude them and look more towards this unadjusted efficiency ratio.