The Banker collects cost/income ratio data from banks as a measure of efficiency among banks across the globe.

While methodology among banks across regions varies and there are regional variations in what is included, The Banker hopes to provide a global picture, but it is determined by banks’ approach to this measure.

The calculation divides operating expenses, including depreciation but without provisions, by the sum of the net interest income and non-interest income. The higher the ratio, the more inefficient the bank or group of banks are deemed to be.

Japan continues to be the country with the highest cost/income ratio but this year the ratio has deteriorated, indicating declining efficiency. In the 2008 ranking, ­Japan’s ratio rose to 73.61%, up from 69.39% in last year’s ­ranking.

With seven of the Top 10 banks in Japan producing reduced pre-tax profits, and profits at most other Japanese banks in decline, the income side of the ratio was reduced, causing efficiency to weaken.

The US represents another major country where the cost/income ratio has deteriorated significantly. The US ratio, generally always seen as an efficient model, rose in the 2008 ranking to 63.54% from 59.91% the previous year. This again appears to reflect significantly reduced profits, due to the subprime crisis, at US banks including major players such as Citigroup, Bank of America and Wachovia, where profits fell by 94.3%, 36.4% and 25.6% respectively.

Latin America and EU banks also slipped slightly with the Latins rising to 56.95% from 55.63% and the EU(27) rising to 58.54% from 57.57% the previous year. Again, lower income could be seen to be the reason behind the decline.

Asia represents one of the major regions where cost/income ratios improved rather than declined. Asian banks went below the key 50% mark for the first time, reaching 49.19% in the 2008 ranking compared to 52.97% the previous year and 56.15% in 2003. While analysts point to 40% as an ideal ratio, the Asians with improved income are definitely improving their efficiency.

The Middle East banks slipped marginally as income expanded and costs rose in booming markets. Middle East went up to 39.91% from 39.31% previously but here the effect of different methodologies should also be considered. The rest of Europe, mainly non-EU and central Europe, improved to 50.93% from 51.17% and the rest of the world improved significantly to 57.72% from 60.52%.

The simple message is that emerging economies are showing improving efficiency while the developed world is slipping back as a result of reduced incomes.

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