DEFINITION of ‘Yield On Earning Assets’
A financial solvency ratio that compares a financial institution’s interest income to its earning assets. Yield on earning assets (YEA) indicates how well assets are performing by looking at how much income they bring in.
BREAKING DOWN ‘Yield On Earning Assets’
Banks and financial institutions that provide loans and other investment options that offer yields have to strike a balance between the different types of investment vehicles, duration, and markets that it offers loans to. Generally speaking, the higher a company’s loan to asset ratio, the higher its yield on returning assets. This is because higher-yielding investment vehicles bring in more income relative to the amount of money on loan.
High yield on returning assets is an indicator that a company is bringing in a large amount of dividend and investment income from the loans and investments that it makes. This is often the result of good policies, such as ensuring that loans are properly priced and investments are properly managed, as well as the company’s ability to garner a larger share of the market.
Financial institutions with a low yield on earnings assets are at an increased risk of insolvency, which is the reason why the YEA is of interest to regulators. A low ratio means that a company is providing loans that do not perform well, since the amount of interest from those loans is approaching the value of the earning assets. Regulators may take this as an indicator that a company’s policies are creating a scenario in which the company will not be able to cover losses, and could thus become insolvent.
Increasing a low YEA often involves a review and restructuring of a company’s policies and approach to risk management, as well as a review of the general operations of how the company chooses which loans to provide to which markets.