How to calculate cost-to-income ratio of a bank?

By Research Desk
about 6 years ago

Cost-to-income ratio is calculated by dividing the operating expenses by the operating income generated i.e.net interest income plus the other income.

 

Cost-to-income ratio = Operating Expenses

                                     Operating Income

 

where, Operating Expenses = Employee Cost + Other Operating Expenses

Operating Income = Net Interest Income + Other Income

 

Cost-to-income ratio is important for determining the profitability of a bank. The ratio gives a clear view of how efficiently the bank is being run - the lower the ratio, the more profitable the bank. Changes in the ratio also highlight potential problems - if the ratio rises from one period to the next, it means that costs are rising at a higher rate than income. Thus there is an inverse relationship between the cost-to-income ratio and the bank's profitability.

 

Let us calculate the cost-to-income ratio for HDFC Bank for FY13 from the below data (extracted from its FY13 audited standalone financial results):

 

Sr. No.

Amount in Rs. crore

FY13

FY12

A

Interest Earned

35,065

27,874

B

Other Income

6,853

5,790

C

Total Income

41,918

33,664

D

Interest Expended

19,254

14,990

E

Operating Expenses

11,236

9,278

F

 : Employee Cost

3,965

3,400

G

 : Other Operating Expenses

7,271

5,878

 

Computation:

   

H

Net Interest Income (A – D)

15,811

12,884

I

Operating Income (H + B)

22,664

18,674

J

Cost-to-Income Ratio (E ÷ I × 100)

49.58%

49.68

 

Thus, HDFC Bank’s cost-to-income ratio for FY13 is 49.58% which is 100 basis points lower than the level in FY12, indicating efficiency in performance.

 

Let us consider another example – Punjab National Bank (extract of its audited standalone FY13 financial results):

 

Sr. No.

Amount in Rs. crore

FY13

FY12

A

Interest Earned

41,893

36,476

B

Other Income

4,216

4,203

C

Total Income

46,109

40,679

D

Interest Expended

27,037

23,062

E

Operating Expenses

8,165

7,002

F

 : Employee Cost

5,675

4,723

G

 : Other Operating Expenses

2,490

2,279

 

Computation:

   

H

Net Interest Income (A – D)

14,856

13,414

I

Operating Income (H + B)

19,072

17,617

J

Cost-to-Income Ratio (E ÷ I × 100)

42.81%

39.75%

 

Thus, for PNB, cost-to income ratio has deteriorated in FY13 i.e. it incurred higher cost (42.811 paise for every rupee earned during the year, as against 39.75 paise incurred in FY12 to earn a rupee).

 

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