Variable Description Calculation Cost to income ratio (CIR) Also called the cost/income ratio or C/I ratio is the measure of the costs of running a company in relation to its operating income. The ratio gives investors a clear view of how efficiently the company is being run. The lower the C/I ratio is, the more profitable it should be. $=\frac{\text{operatingexpenses}}{\text{operatingincome}}$ Profit before tax (PBT) PBT is a measure that looks at a company’s profits before the company has to pay corporate income tax. It deducts all expenses from revenue including interest expenses and operating expenses except for income tax. = income – operating expenses (including interest but not tax) Net interest margin (NIM) NIM is the ratio of net interest income to invested assets. A positive net interest margin means the investment strategy pays more interest than it costs. Conversely, if net interest margin is negative, it means the investment strategy costs more than it makes. $=\frac{\text{InterestReceived}-\text{InterestPaid}}{\text{AverageInvestedAssets}}$ Asset Quality A measure of the likelihood of default of a loan, combined with a measure of its marketability. It is a measure of the price at which a bank or other financial institution can sell a loan or lease to a third party, as determined by the borrower. We consider Asset quality ratio. i.e. impairment charge to loan and advances Impairment allowance to loan and advances $=\frac{\text{Impairmentcharge}}{\text{Loanandadvances}}$ $=\frac{\text{Impairmentallowance}}{\text{Loansandadvances}}$ Liquidity Liquidity is the ability to convert assets into cash quickly and cheaply. Liquidity ratios are an important class of financial metrics used to determine a debtor’s ability to pay off current debt obligations without raising external capital. We consider Liquid funds to total deposits and Liquid funds to total assets. $=\frac{\text{Liquidfunds}}{\text{Totaldeposits}}$ $=\frac{\text{Liquidfunds}}{\text{Totalassets}}$ Return on assets (ROA) ROA is an indicator of how profitable a company is relative to its total assets. ROA gives a manager, investor, or analyst an idea as to how efficient a company’s management is at using its assets to generate earnings. Return on assets is usually expressed as a percentage. $=\frac{\text{Netincome}}{\text{Totalassets}}$ Return on equity (ROE) ROE is considered a measure of how effectively management is using a company’s assets to create profits. A good or bad ROE will depend on what’s normal for the industry or company peers. Relatively high or low ROE ratios will vary significantly from one industry group or sector to another. $=\frac{\text{Netincome}}{\text{Averagedshareholdersequity}}$ Non-Performing Loans (NPL) The sum of borrowed money upon which the debtor has not made the scheduled payments for a specified period. It is considered in default or close to default. Once a loan is non-performing, the odds the debtor will repay it in full are substantially lower. $=\frac{\text{TotalNPL}}{\text{Totaloutstandingloans}}$ Capital adequacy ratio (CAR) The measurement of a bank’s available capital expressed as a percentage of a bank’s risk-weighted credit exposures. It is used to protect depositors and promote the stability and efficiency of financial systems. Two types of capital are measured: tier-1 capital, which can absorb losses without a bank being required to cease trading, and tier-2 capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors. $=\frac{\text{Tier}1\text{capital}+\text{Tier}2\text{capital}}{\text{Riskweightedassets}}$