Despite Spiralling Inflation Rate, Banks Maintain Modest Cost-to-Income Ratio

Kayode Tokede

Despite raging inflation rate, banks operating in Nigeria led by Guaranty Trust Holdings Company Plc (GTCO) and other financial institutions to maintained modest Cost-to-Income Ratio (CIR) in half year ended June 2024.

CIR is important for determining the profitability of a bank and it gives a clear view of how efficiently the bank is being run. The lower the ratio, the more profitable the bank. 

In the banking sector, CIR is a critical indicator of operational efficiency. A lower CIR can reflect better cost management, higher productivity, or both. However, it should be analysed alongside other metrics like Return on Equity (ROE) and Net Interest Margin (NIM) for a holistic assessment.

For banks, an ideal CIR is typically between 40 per cent and 60 per cent, though this can vary based on the industry and geographic region.

Inflation rate in Nigeria, according to the National Bureau of Statistics (NBS) increased to 34.19 per cent as of June 2024 from 28.92 per cent it closed in 2023. 

The rise in inflation rate was driven primarily by escalating food prices, soaring energy costs and ongoing volatility in foreign exchange markets.

THISDAY analysis of Nigerian banks half year 2024 results revealed that GTCO’s CIR dropped to 16.74 per cent as of June 2024 from 29.13 per cent reported in 2023 financial year amid increasing operating expenses.

The lender in the period under review emerged as the most profitable bank, reporting N1 trillion profit before tax, about 207 per cent increase from N327.4billion in H1 2023.

GTCO reported N201.8 billion total operating expenses (Opex) in H1 2024, about 60.7 per cent or N76.22 billion from N125.56 billion in H1 2023, while its operating income stood at N1.21 trillion in H1 2024, about 126 per cent increase from N524.3billion in H1 2023.

The lender in a statement stated that, “OPEX growth of 60.7 per cent was precipitated by growth in headline inflation in Nigeria, other West and East African Jurisdiction of operations; specifically, Nigeria’s inflation closed at 34.2 per cent as at H1 2024.

“Operating cost was also impacted by adverse movement in exchange rate. The impact of Inflation combined with exchange rate movements and growth in business volume led to increase in technology and regulatory costs – Deposit Insurance Premium and AMCON expenses. The Group also reviewed salary upward to enable employees cope with increased cost of living resulting in N20.8billion growth in personnel cost to N41.5billion.

“Operating cost was also negatively impacted by the translation of other Subsidiaries numbers to Naira, the functional currency for Group reporting in view of higher rate of depreciation of naira relative to depreciation suffered by other 3rd currencies in West and East Africa operating environments where the Group has presence. The Group continued to leverage its FCY liquidity to fund all foreign currency-denominated transactions thus preventing creation of FCY obligations.”

Similarly, other Tier-I and II banks investigated by THISDAY recorded Cost-to-Income Ratio below 70 per cent in the period under review.

Data compiled by THISDAY showed that Zenith Bank recorded 39.40 per cent Cost-to-Income Ratio in H1 2024 from 36.10 per cent in 2023 followed by Fidelity Bank Plc with 40.30 per cent Cost-to-Income Ratio as of H1 2024 from  50.40 per cent reported in 2023FY.

Zenith Bank in a statement stated that, “We continued to strive for operational efficiency, resulting in only a marginal increase in our cost-to-income ratio YoY from 38.5per cent in H1 2023 to 39.4per cent.”

Zenith Bank in the period was second most profitable bank after GTCO. Its profit before tax stood at N727.03 billion in H1 2024, about 108 per cent increase over N350.36 billion reported in H1 2023. 

Other bank with Cost-to-Income Ratio below 50 per cent threshold include: FBN Holdings at 46.90 per cent as of H1 2024 from 49.10 per cent in 2023, while Stanbic IBTC Holdings declared 42.80 per cent Cost-to-Income Ratio as of H1 2024 from 47 per cent in 2023FY.

Commenting, the Vice President, Highcap Securities Limited, Mr. David Adnori stated that the ratio measures the efficiency of a bank in managing its expenses relative to its income.

He said, “It shows how much money the bank spends to generate a naira of income, for example, GTCO – the bank burns just N0.16 to generate N1 income in the period under review.” He commended banks operating in Nigeria and other part of Afriuca for remaining resilience amid macroeconomy challenges.