Loan-Loss Coverage Ratio

i = Pretax income (before security transactions)
p = Provision for loan losses
c = Net charge-offs

Banks use the loan-loss coverage ratio to define the quality of its assets and how well it protects itself from losses caused by problematic loans. The higher this ratio is, the better the bank is handling itself in regards to loans.

Pretax income is the income a party receives before Federal and Income taxes and fees for security gains and losses have been deducted.

Provision for loan losses is an amount that is paid to the bank to reserve the loan in the event that the loan is lost.

A charge-off is established when a loan has been considered uncollectible. The bank writes off a loan as a charge-off when it doesn't believe the customer will pay the loan off. In this equation, the net charge-offs is the total amount of money lent through loans that the bank doesn't expect to get back.

To use this calculator, enter the amount for pretax income, provision for loan losses, and net charge-offs in the respective boxes. To get the loan-loss coverage ratio, press "Calculate."

Works Cited
Siegel, Joel G., Jae K. Shim, and Stephen W. Hartman. Business Formulas. New
York: McGraw-Hill, 1998.


to localise (eg: malaysian finance sector) , simplified method is enough for use
Loan-Loss Coverage Ratio = allowance / gross npl