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Cost/Income Ratio

 

Cost/income ratio is very popular financial ratio in bank analysis. This ratio measures the relation of bank’s operating costs to operating income. Basically, lower ratio is better because means higher profitability but high ‘cost to income ratio’ may indicate several things:

  • Bank is managed not very efficiently (if other banks in the same market have lower cost/income ratio).
  • The banking market is very competitive (all banks in that market have high cost/income ratio).
  • It is temporary because of changing strategy or market conditions, and it is going to improve (historical analysis of this ratio should confirm or deny it).

 

It is a goal of every business to reduce costs and to increase income, and banks are no different at it. Of course, it is not so easy to do this in reality as it sounds because cuts in expenses may hurt income sources if quality of the services will become worse.

 

Cost/income ratio formula


‘Cost to income ratio’ = Operating costs / Operating income

 

* Operating costs and operating income have to be for the same period and can be found in income statement.

 

 

 






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