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Cost-to-income ratios show where recovery is strongest

The cost-to-income ratios of banks in Africa and eastern Europe and Africa show that banks in both regions are keeping a lid on costs, something that is eluding many of their Latin American and Asian counterparts.
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Banks' cost-to-income ratios have long been a well-watched indicator of efficiency. Historically, the ratio has also been a helpful measure of regional banking systems’ evolution over time, demonstrating in numbers the efficiencies that can be gained as state-owned institutions become private banks.

This year, however, the regional averages are more indicative of banking system recovery. Africa’s average cost to income, for example, has fallen by more than 10 percentage points to 49.7%, from 61.87% in the 2010 ranking. This reflects the recovery of the continent's banks, and particularly the ongoing recovery of those in its biggest economy, Nigeria.

It can be a revealing computation, as the interrelation between income growth and operating costs can show which banks have most scrupulously managed costs, even as they are building out the business and chasing top-line growth.

Looking at how these two areas interrelate shows even more clearly the dramatic recovery of African banks. On average, their operating costs have risen by more than 19%, yet the cost-to-income ratio has still fallen by more than 10%.

Banks in eastern Europe have also done well at keeping the lid on costs. While operating costs have risen by an average of almost 10.5%, the region has managed to improve efficiency, with the cost to income falling to 44.64%, from 52.41% in 2010.

Latin America, on the other hand, has done a less successful job of growing while managing cost: the region’s operating costs have risen by almost 13%, but its cost-to-income ratio is 61.63%, up from 55.4% last year.

Similarly, Asia (excluding China) has seen both operating costs and cost to income rise, by 19.11% and 4.76%, respectively.

Looking at figures on a bank-by-bank basis, it is striking that of the top 25 banks in our Top 1000 ranking, Chinese banks have the lowest costs – with all of the big players keeping their cost-to-income ratio below 40%. While this is likely to be as much to do with the Chinese banking system’s huge potential for generating income as it is with the banks’ cost management, Chinese banks are doing well to control what must be spiralling costs across their vast branch networks.

It is unsurprising that of the top 25 banks, those with the highest cost-to-income ratios include two investment banks, Morgan Stanley (79.01%) and Deutsche Bank (74.76%), and two of the four Japanese banks, Mitsubishi UFJ Financial Group (77.96%) and Mizuho Financial Group (72.36%).

Cost-to-income ratios

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