Internal Capital Generation Rate (ICGR)
What Is the Internal Capital Generation Rate (ICGR)?
The internal capital generation rate (ICGR) is a quantifiable mathematical rate that depicts how rapidly a bank can generate. The internal capital generation rate is calculated by partitioning the bank's retained earnings by the average balance of the combined equity of all stockholders for a given accounting period. The bank's retained earnings are found by deducting dividends paid from net income utilizing the income statement, while the value of proprietors' equity can be found on the balance sheet.
A higher ICGR builds a bank's profitability and shows that it has extra capital available for making new loans.
The Formula for the Internal Capital Generation Rate (ICGR) Is
What Does the Internal Capital Generation Rate (ICGR) Tell You?
The higher the internal capital generation rate, the more able a bank is to deliver capital to loan to borrowers that hence generate new interest income for the bank. The internal capital generate rate improves with a bank's overall profitability and is likewise impacted by the price of its stock since the stock price is connected with the value of average proprietors' equity.
An alternative method for ascertaining the internal capital generation rate is to take the plowback ratio and duplicate by the return on equity (ROE). The plowback ratio is avoided over after dividends have been paid with regard to retained earnings.
Yet one more method for thinking of the ICGR is that it lets a bank know that depending just on internally generated capital, it can grow its resources by a certain amount while keeping up with its [capital ratio](/level 1-capital-ratio). In this case, the calculation can be modified to:
Illustration of How to Use the Internal Capital Generation Rate (ICGR)
As a speculative model, if the plowback ratio for a still up in the air to be 0.80 and its return on equity is 17%, the internal capital generation rate is 13.6%. In this manner, the company developed its internal capital equity by 13.6%:
Alternatively, we can begin with a retained earnings for a company of $650,000 and find from the balance sheet that average proprietors' equity for the period was valued at $4.78 million. The internal capital generation rate would in this manner be $650,000/$4,780,000 = 0.136, or 13.6%. One way or another, the two methods of computing the company's ICGR produce a similar outcome.
