## What Is the Internal Capital Generation Rate (ICGR)?

The internal capital generation rate (ICGR) is a quantifiable mathematical rate that portrays how quickly a bank is able to generate. The internal capital generation rate is calculated by dividing 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 subtracting dividends paid from net income using the income statement, while the value of owners' equity can be found on the balance sheet.

A higher ICGR increases a bank's profitability and indicates that it has additional capital available for making new loans.

## The Formula for the Internal Capital Generation Rate (ICGR) Is

$ICGR = \frac{\text{Retained earnings}}{\text{Average combined equity}}$

## What Does the Internal Capital Generation Rate (ICGR) Tell You?

The higher the internal capital generation rate, the more able a bank is to produce capital in order to loan to borrowers that subsequently generate new interest income for the bank. The internal capital generate rate improves with a bank's overall profitability and is also affected by the price of its stock since the stock price is related to the value of average owners' equity.

An alternative way to calculate the internal capital generation rate is to take the plowback ratio and multiply by the return on equity (ROE). The plowback ratio is what is left over after dividends have been paid out of retained earnings.

Yet another way to think of the ICGR is that it tells a bank that relying only on internally generated capital, it can expand its assets by a certain amount while maintaining its capital ratio. In this case, the calculation can be modified to:

$\begin{aligned} ICGR &= \text{Return on equity}*\left(1-\text{dividend payout ratio}\right)\\ &= \text{Return on equity}*\text{Plowback ratio} \end{aligned}$

## Example of How to Use the Internal Capital Generation Rate (ICGR)

As a hypothetical example, if the plowback ratio for a company is determined to be 0.80 and its return on equity is 17%, the internal capital generation rate is 13.6%. Thus, the company grew its internal capital equity by 13.6%:

$ICGR = 0.17 * 0.80 = 0.136$

Alternatively, we can start with a retained earnings for a company of $650,000 and find from the balance sheet that average owners' equity for the period was valued at $4.78 million. The internal capital generation rate would thus be $650,000 / $4,780,000 = 0.136, or 13.6%. Either way, the two methods of calculating the firm's ICGR produce the same result.