Question

What are some key differences in the financial ratios for small banks versus large banks?

Answer 1

1. Asset utilization ratio

Asset utilization ratio for small banks is higher than large banks because their business is accepting depositor’s fund and to pay for the depositors funds they invest more in fixed assets. Large banks rely more on purchased funds for capital mainly used to give loans which proves to be more profitable for banks. So asset utilization ratio for large banks is lower.

1. The Loan-to-Assets Ratio

Total Loan to asset ratio helps defining banks operational profitability. When large banks have high loan to asset ratio it signifies that they have small proportion of tangible assets as a part of total assets and they derive more of their income from loans and investments. While small banks mainly thrive on higher tangible assets to maintain a good loan to asset ratio. A loan to asset ratio is better for all banks which signifies that bank has diversified its income earning sources.

1. Non-interest income to operating income ratio

Non-interest income to operating income ratio is higher for large banks in comparison to small banks because their business heavily depends on offering their clients off balance sheet services like demand draft, offer laden debit and credit cards that attract fee on them. Small banks focus their business on interest generating activities to produce profits.

1. Liquidity ratio

Small banks have lower liquidity ratio than large banks. Liquidity is inversely proportional to profitability for small banks while it is independent of profitability in case of large banks. To maintain high liquidity, small banks will have to keep more cash & cash like assets and it would come at the cost of profitability because it would limit their resources for profit generation. Unlikely, large banks keep more liquid assets (reserves) I order to maintain a minimum required by the Fed Reserve. In case of liquidity crunch large banks access to Fed Funds and also have access to discount windows.