Cost to Income Ratio
The cost to income ratio measures a bank's operating expenses, branches, staff, technology, against its total income from interest and fees. It is the efficiency ratio for lenders, where asset turnover does not apply.
Formula
Cost to Income
Cost to Income (%) = Operating Expenses ÷ (Net Interest Income + Other Income) × 100
Benchmark: Lower is better; a rising ratio at a young bank is expansion, at an old bank it is a problem
Reading the number
The notes observe that operating expenses tend to look similar across established banks, because rent and salaries are comparable. That makes the cost to income ratio most useful in two situations: spotting a bank whose income is not keeping pace with its cost base, and judging a new bank that is spending heavily to grow.
For a new bank, high operating costs are partly forgivable. Branches are new, marketing is aggressive, and some setup cost even gets capitalised. The question is whether the ratio is falling as the branch network matures. For an established bank, a rising ratio means either costs are out of control or income is shrinking, and neither is good.
Indian example
Related ratios
Glossary terms
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