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Cost-Income Ratio is a useful performance indicator we can use to guage the efficiency of a bank’s operations.

In Malaysia currently, the Cost-Income Ratio for our banking sector varies from between 30% – 50%. The most efficient bank in terms of Cost-Income is still Public Bank which last year brought its CI down to just 31%. Here’s a snapshot:

Public Bank: 31%
Hong Leong Bank: 42%
AMMB: 49%
Bumiputra Commerce: 52%
Maybank: 44%
Affin: 50%

Calculation of Cost-Income Ratio
Cost Income Ratio is essentially a bank’s Operating Expenses (excluding goodwill amortization) divided by its Operating Income (comprising of its Net Interest Income, Islamic Banking and Other Income).

=                                 (Operating Expenses – Goodwill Amortization Expense)
      —————————————————————————————————————
        (Interest Income – Interest Expense + Islamic Banking Income + Other Op Income)

Example 1: AMMB 2009 (YE 31/3/09)
Other Operting Expenses: RM1,612.1 million
Amortization Expense: NIL
Net Interest Income: RM1,776.3 million
Islamic Banking Income: RM572.6 million
Other Operating Income: RM922 million

Cost-Income Ratio = 1612.1 / (1776.3+572.6+922) = 49.3%

Note: In its recent quarterly results, AMMB showed a dramatic improvement in its Cost-Income Ratio, bringing it down to under 40% for the June-09 quarter. AMMB attributes the improved figure to higher revenue growth for that quarter.

Example 2: HONG LEONG BANK 2009 (YE 30/6/09)
Operating Expenses: RM876.6 million
Amortization Expense: NIL
Net Interest Income: RM1,353.1 million
Islamic Banking Income: RM176.3 million
Other Operating Income: RM569.5 million

Cost-Income Ratio = 876.6 / (1353.1+176.3+569.5) = 41.8%

Example 3: BUMIPUTRA COMMERCE 2008 (YE 31/12/08)
Operting Expenses: RM4,121.8 million
Amortization Expense: RM122.9 million
Net Interest Income: RM4,660.6 million
Islamic Banking Income: RM437.8 million
Other Operating Income: RM2,642.1 million

Cost-Income Ratio = (4121.8-122.9) / (4660.6+2642.1+437.8) = 51.7%