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

By Research Desk 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).