Cost to Income Ratio in finance

 Well I hope most of us are well aware of how a company calculates it's profit after all the investments and it's return. But we all often only look into the direct returns only. But it does that be sufficient enough to just judge how good profit the company is earning. Of course not and especially in case of banks and NBFCs the way the profit and analysis takes place is completely different. Well today we are going to discuss one such ratio which can help us understand the performance of a bank. It is the cost to income ratio.
The cost to income ratio shows the relation between the income and the cost involved in acquiring that income. It is an important financial ratio, particularly in analyzing banking stocks. There is an inverse relationship between the cost income ratio and the bank profitability. 
The lower a bank's cost to income ratio, the more efficiently a bank operates which results in increased profitability.  Even the rise in ratio on every yearly basis clearly shows that the costs are rising at a higher rate than income which effects the profitability of the bank. The ratio also helps to make strategic growth decisions and planning. 

Calculation of Cost to Income ratio:-

To calculate the cost Income ratio, simply divide the operating expenses by the operating income for the same period. operating expenses include all the cost of running a bank such as the Employee cost, Rent, Advertisement, etc. Hence we can say that,

The operating income= Net interest income + other income

Therefore, 

   Cost to income ratio= Operating expenses / Operating income

Let us have a look at the above cost to income ratio in last 5 years as of the end of march quarter of a well Known banking stock State Bank of India (SBI) as per the data taken from money control. There has been a huge decline in the cost to income ratio in the year 2018 to 2020. This significant decrease in the ratio shows that the bank has reduced its operating expenses with the rising demand over the years and this is clearly reflecting on its strong supports at the stock prices too. Hence the bank has always been fundamentally strong to look at in the banking sector. Therefore the ratios like cost to income ratio and cost to liability ratio could always be good to look at while analyzing any stock often.