Cost to Income Ratio

Cost-to-Income Ratio (CIR) is similar to the Operating Profit Margin or in simple terms the ratio of your operating profit to the revenue that a company makes. It is used to determine how efficiently a company is being run and how it earns its own organic income. Whilst this is a broader definition, banks do have a slightly different way at presenting their financial statements. For instance, most industries determine what their operating profit is by deducting the cost of sales from revenues to arrive at Gross Profit, after which they deduct Operating Expenses to get operating profits. But banks do not have cost of sales considering that they provide services and do not hold inventories.

The CIR 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 is important for determining the profitability of a bank. It 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.