The operating income ratios of banks in developed countries show that American and British banks relied to a greater extent on fee-based income than banks in continental European countries. For the American money center banks, the share of fee-based income was 46%. Among developing countries, banks in Egypt and Greece have high levels of fee-based income. In Egypt, this was due to limits on interest spreads and to a high level of regulated commivsions. In Greece, it was partly caused by the suspension of interest accrual on large volumes of nonperforming loans. Among Hungarian banks, the noninterest income of the NSB was very high, but this reflected its involvement in nonbanking business. The four large commercial banks generated 38% of their gross income from fee-based services.

The total cost/income ratios of banks in developed countries, including operating costs and provisions, range between 75% and 85% of gross income. The only exceptions are the UK building societie, with a low cost ratio of only 48% and the American money center banks with an unusually high ratio of 92%. The latter has been caused by the large volume of provisions at 25% of gross income. Hungarian banks at 59% generally had low total cost/income ratios. Worth noting is the very low cost/income ratio of the 2 joint venture banks. At 26% these must rank among the lowest such ratios anywhere in the world. This is clearly related to the limited range of their services, their limited branch networks and their generally high level of operating efficiency as well as their low leverage".

ROE analysis provides a combination of ratios that may best summarize the various operating ratios of banks and may be very useful in analyzing differences in performance across groups of banks or across countries. ROE analysis is based on two fundamental identities of bank operating ratios. First, the ROA is equal to the product of the gross income margin (gross income as a proportion of total assets) and the profit ratio (net income as a proportion of gross income); and second, the ROE is equal to the product of the ROA and bank leverage (i.e. the inverse of the equity capitalization ratio)"<sup>6</sup> .

The ROE analysis for Hungarian banks (Table 2) shows clearly the positive impact of low leverage on the profit ratio, gross margin and ROA of the joint venture banks. Yet, their real ROE is very low. The ROE analysis for banks in high income countries (Table 3) also shows that smaller banks which have lower leverage require a bigger ROA to achieve a given ROE than large banks which operate with higher leverage. Banks in France and Austria report satsifactory ROEs despite their low ROAs because of their high leverage.

Similarly, banks with a higher profit ratio require a higher gross margin to achieve a given level of ROA than banks with a lower profit ratio. The last point is clearly seen by contrasting the experience of two groups of institutions that have very similar ROAs but big differences in their profit ratios and gross income margins: the UK building societies, which have a profit ratio of 52% and a gross income margin of 2.4% and the Spanish commercial banks, which report a profit ratio of 24% and a gross income margin of _5%._

**'5** It is emphasized that low leverage inflates gross income and therefore compresses the cost/income ratio.

IG In algebraic notation, if P stands for net income, G for gross income, E for equity and A for total assets, the first identity stteshtat P/G * G/A = P/A and the second that P/A * A/E = P/E.

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