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Global Cost-To-Income Ratios Show Regional Diversions For Banks

Banks across the globe generally continued to improve their cost-to-income ratios in 2016, though results differed widely on a regional level, an analysis by S&P Global Market Intelligence shows.

The ratio, which measures operating expense as a percentage of operating income, is used to gauge efficiency and productivity for banks. Lower ratios generally indicate higher efficiency, but a number of factors can affect the ratio, including a bank's business model and size. The economic, financial, and regulatory environment of each country can also impact the ratios.

For the majority of countries in North America, the Middle East, and Africa, banks' average cost-to-income ratios improved year-over-year, while the ratio deteriorated in the majority of European and Latin American countries.

Banks in the Middle East and Africa continued to have the lowest cost-to-income ratios on average than anywhere else in the world
Importantly, banks around the world report financial results for a given period on different timelines, sometimes with fiscal year-ends that do not correspond to the calendar year-end. S&P Global Market Intelligence used data available for each bank for the most recent full-year period available. In the majority of cases, that was 2016; however, for a portion of the banks in the sample, the most recent data was older.

While the average cost-to-income ratios in 16 of the 23 European countries included in the sample deteriorated, the region was home to some of the biggest year-over-year improvements. Banks in Ireland, for one, saw their ratio improve by more than 20 percentage points to 58.65%, while those in Hungary posted a 15.05 percentage point improvement to 63.11%.

Conversely, while the average cost-to-income ratio in nine of the 14 Middle East and Africa countries saw improvement, the region was home to the biggest average country-level increase in the metric; for the 15 Algerian banks included in the sample, the average cost-to-income ratio in 2016 stood at 35.29%, up 10.27 percentage points from a year earlier.

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Still, banks in the Middle East and Africa continued to have the lowest cost-to-income ratios on average than anywhere else in the world, at 43.41%, and was home to some of the lowest country-level ratios, including Iraq at 12.44% and Egypt at 27.36%.

Average cost to income ratios in select countries, FY'16(%)

Asia-Pacific

Regionally, banks in the Asia-Pacific region were the only group to have an average cost-to-income ratio worse than a year earlier, with the average ratio ticking to 51.27% from 50.63%. The ratio in eight of the 16 Asia-Pacific countries included in the sample deteriorated, with South Korea showing the biggest increase year-over-year, rising 9.30 percentage points to 65.75% for the highest ratio in the region. Taiwan and Japan also had above-average ratios, at 59.94% and 59.53%, respectively.

China, Asia's largest economy, had the region's lowest average cost-to-income ratio, with the 202 Chinese banks included in the sample showing an average of 34.20% after improving 141 basis points from year-ago levels.

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Jun 28, 2017
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