Banking
Cost-to-income ratio
Operating costs as a share of operating income. Lower means a more efficient bank.
Last reviewedWhat does Cost-to-income ratio mean?
The cost-to-income ratio is a bank's operating expenses (staff, branches, technology) divided by its operating income (net interest income plus fee income). It measures efficiency: a ratio of 45 percent means the bank spends 45 cents to earn each 1 of income. Example: income of 200 and costs of 110 give a ratio of 55 percent. Loan losses are usually left out, so a bank can have a low ratio and still lose money if many loans go bad. In the United States it is often called the efficiency ratio.
Where does it come up in case interview prep?
Related terms
- Net interest margin (NIM)What a bank earns on its loans and investments after paying for its funding, as a share of those assets.
- Cost of riskLoan loss charges as a share of loans, usually quoted in basis points.
- Operating leverageHow much profit swings when revenue changes, because of fixed costs.
- Non-performing loan (NPL) ratioThe share of a bank's loans that borrowers have stopped paying.
- CET1 capital ratio (and risk-weighted assets)A bank's highest-quality capital as a share of its risk-weighted assets.
- Liquidity coverage ratio (LCR)Whether a bank holds enough easy-to-sell assets to survive 30 days of stress.
- Loan-to-deposit ratio (LDR)Loans divided by deposits: how much of its deposit base a bank has lent out.
- CASA ratioThe share of deposits held in low-cost current and savings accounts.