Cost-to-income ratio of banks in Europe Q4 2023, by country
The cost-to-income ratio (CIR) is an important financial metric in determining the profitability of banks. The measure looks at the cost of running operations as a percentage of a bank’s operating income. Lower ratios mean that a bank is running more profitably, whereas a higher cost-to-income ratio indicates the bank's operating expenses are too high. As of December 2023, the highest cost-to-income ratio in Europe was recorded in Lichtenstein, followed by France and Germany.
Profitability and stability
Low profitability has been highlighted several times by the ECB as a key risk to the financial stability of the Euro area. Prolonged low profitability can have a knock-on effect on an economy’s growth. On the other hand, sustained periods of higher than average profitability can also mean trouble, as was seen in the period leading up to the financial crisis.
Other key measures
Although, cost-to-income is a good measure of profitability for banks, there are several other metrics that can also be used. Return on equity (ROE), which divides net income by shareholders equity, looks at how well a company’s management is using its assets to create profits. Another key measure of a bank's profitability is the return on assets (ROA), which divides a bank’s net income by its total assets during a given period.