How To Examine The Efficiency Ratio

Lower efficiency ratios allow credit unions to return more value to members, build capital, and invest in products and infrastructure.


This chart provides insight into the credit union’s overhead.

Formula Definition
The efficiency ratio divides a credit union’s operating expenses by total income minus interest expense:

Total operating expense
Income – interest expense


A high or rising efficiency ratio means that the credit union is losing a larger share of its income to overhead expenses. A low efficiency ratio means that operating expenses are a smaller percentage of income or, said another way, that a credit union is more comfortably able to cover operating expenses. The lower the efficiency ratio, the better. This ratio does not include the provision for loan loss.

The efficiency ratio can fluctuate over time and is influenced in part by the interest rate environment in that income is generally more sensitive to changes in interest rates than expenses. In theory, credit unions with higher ratios of fee income to total income should see less fluctuation in the efficiency ratio than credit unions with little fee income.

This chart can be used to:
• Observe long-term trends in expenses relative to income
• Assess the need for greater expense control
• Compare efficiency to that of peers


Performance Analysis
The U.S. average of the efficiency ratio is 67.8%. Peer groups, based on asset sizes, range significantly.  Due to the large number of credit unions with assets less than $50 million, the median of all credit union efficiency ratios is 83.1%, which is closer to the peer group average of 87.2% of credit unions less than $50 million than either of the other peer group averages.

Credit unions with lower efficiency ratios generally exhibit strong operational discipline to keep expenses in check.  Credit unions with higher efficiency ratios over time should seek opportunities to control costs or grow income while maintaining the current level of expenses. Click here to see the credit unions with the lowest efficiency ratios.

A lower efficiency ratio over a longer period of time means more income is available to return to members, build capital as needed and invest in new products and infrastructure.