As a prudent business owner, maximizing profitability is undoubtedly at the forefront of your mind. One effective way to achieve this objective is to keep a close eye on your expenses. However, for banks and Non-Banking Financial Companies (NBFCs), monitoring expenses can be a more complex process, which is where the Cost to Income (C/I) ratio comes into play.
Importance of Cost to Income Ratio(%)
The Cost to income ratio shows the relation between the income and the cost involved in acquiring that income. It is an important financial ratio, particularly in analyzing banking stocks.
This ratio gives a clear view of how efficiently the bank is being run. There is an inverse relationship between the Cost to Income ratio and bank profitability.
The lower a bank’s Cost to Income Ratio, the more efficiently a bank operates which results in increased profitability. On the other hand, if the cost to Income ratio rises yearly it means costs are rising at a higher rate than income which affects the profitability of the bank.
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Therefore the cost to income ratio gives analysts and investors a bird’s-eye view of the Bank’s efficiency.
Banks and other financial institutions often use the ratio to track how costs are changing compared to income so they can make strategic growth decisions.
How to Calculate the Cost to Income Ratio
To calculate the CI Ratio, simply divide the Operating expenses by its Operating income for the same period. Operating expenses include all the costs of running the Bank i.e. Employee cost, Rent, Advertisement, etc. Operating income includes Net interest income + other income. (NII is interest earned – interest expended)
Cost to Income RatioFormula
CI Ratio = Operating expenses / Operating income
Example of Cost to Income Ratio
Let us calculate the CI Ratio of HDFC bank for FY19 from the below data.
HDFC Bank Operating Expenses for FY19 from Profit and Loss Account on Standalone basis -: 261,193,700
Operating Income = NII (interest earned – interest expended) + other income
CI ratio : (%) = (Operating Expense / Operating Income) X 100
= (261,193,700/658,691,069) X 100 = 39.7%
Thus, HDFC Bank’s Cost to Income Ratio improved to 39.7% from 41% in FY18, which means the operating efficiency of the bank has improved which will help in increasing the profitability of the bank.
Earlier in 2015 HDFC Bank was spending Rs. 44.28 to Earn Rs. 100 but now in 2019 bank is spending only Rs. 39.34 to earn the same, so you can see at a glance how efficiently the bank has improved its operating performance over the years.
Nowadays we don’t have to calculate the CI ratio (%) on our own. StockEdge gives us the Cost to Income ratio of the last five years of any bank listed in the stock exchange. We can look at and compare the Cost to Income ratio (%) of any bank and filter out stocks accordingly.
Suppose we want to look at the Cost to Income ratio of HDFC Bank for the last 5 years then in the Fundamental tab of HDFC Bank Ltd., click on the fundamentals tab, we will get the Ratios tab. Then in the Ratios tab click on the Efficiency ratios, we will get the Cost to Income ratio (%) of HDFC Bank Ltd.
Cost to Income ratio (%) is an important financial component to look at when analyzing Banking stocks. It tells us about the profitability and operating efficiency of a business. It can be compared on a yearly basis and with other Banks to understand the strength of the Bank. With a click of a button, you can see the comparison of a Bank’s Cost to Income ratio (%) for five years.
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