Dear Srikanth

Normally the higher this ratio the better indicating the bank is earning a high interest rate or the proportion of interest earning assets (loans) to total assets is high or both of these effects. Too high of interest income to total assets ratio would be attributed to the high interest income (rate) derived from high risk loans (subject to default). Also, if the high interest income is being generated by too high a proportion of assets in loans that could stem from lack of liquidity. That is, the bank should have a reasonable amount of cash and cash like securities (easily converted to cash such as Treasury bills) as part of their total assets to meet withdrawal needs. If the interest income to total assets ratio is too low that usually is from earning low interest income (rate) and/or too little lending.

This ratio refers to the interest earned on the total assets used for this purpose to determine whether the rate is good, too high, or too low in order for the responsible management to decide whether to continue leaving these assets as is or use them differently.

The level of the ratio also depends on the kind of banking business (vg., corporate vs retail) being the core activity of the institution. Non-interest income (proceeds from instruments such as mutual funds, insurances or pension plans) shoud also be considered for analysis.

Best regards.

The short answer is "critical". As alluded to by Raymond Cox above, in a banking context interest income will have been generated from loan assets. Those loans could be to retail borrowers, commercial borrowers or even other banks as part of inter-bank lending.

On the other side of the same coin is interest paid to lenders. For a bank those lenders could be retail lenders (individuals with bank deposits), commercial lenders or other banks as part of wholesale lending.

The different between the above two (interest received minus interest paid) is the net interest margin.

So in looking at the interest earnings on total assets, it would be well to consider:

1. the net interest margin (which should always be positive not negative)

2. quality of assets (high risk versus low risk lending)

3. time series analysis on each of the above to generate insights into how well management have done over, say, the past 5 ot 10 years.

I addressed a couple of case study examples in chapter 5 of my doctoral thesis which you can find here:

Thesis An analytical tool to aid the reflective selection of equity...

Excuse me but in no way it was my intention to be “critical”; simply to note some aspects sometimes forgotten when comparing interest incomes of banks with different core business lines.

interest income for banks is revenue and once you use it as to total assets, it shows efficiency.

its EBIT / Total assets ... so the numerator includes interest

http://www.activemedia-guide.com/busedu_banking.htm

The "Interest income to total assets ratio" reflect banks' reliance on interest from bank lending as a source of funding. A high ratio is a good indicator (but a too high ratio is not necessarily a good indicator), while a low ratio might indicate that banks rely on non-interest source of funds.

Hope this helps!

Best,

Peterson

Interest Income other than commission and brokerage income by Total Assets of Bank.