Cost-to-Income Ratio
The cost-to-income ratio is a bank's operating expenses divided by its operating income, expressed as a percentage: the share of each unit of revenue consumed by running the business before loan losses and tax. Lower is better. It is the standard efficiency measure for banks and lenders, and the number most cost-cutting plans and bank mergers are built around.
- Also known as
- CIR, Cost/income ratio, C/I ratio, Efficiency ratio
- Formula
- operating expenses (staff, premises, technology, depreciation and amortisation) ÷ operating income (net interest income plus fees, trading and other income); loan-loss provisions and tax sit outside both
- Current level
- 53.06% for the significant banks the ECB supervises in the second quarter of 2026, the lowest since the ECB's series began in 2015; the equivalent US measure for all FDIC-insured institutions was 55.38% in the same quarter
- Also called
- the efficiency ratio in US reporting, where the FDIC computes it as non-interest expense less amortisation of intangibles, over net interest income plus non-interest income
- Binding
- no — a management and supervisory metric, not a regulatory limit; each bank defines its own adjustments
- Used at
- bank results and targets, supervisory statistics, peer benchmarking, and the synergy case in bank and lender acquisitions
How the cost-to-income ratio works in practice
The ratio has two moving parts, and a bank can improve it from either side. Income rising faster than costs improves it without any cut: in the ECB's figures for the second quarter of 2026, operating income grew 6% and administrative expenses and depreciation 4%, and the ratio fell to a record low. A falling ratio in a period of high interest rates therefore says as much about net interest margin as about management, and it climbs back when rates fall unless costs follow.
Definitions differ. Some banks exclude restructuring charges, bank levies or litigation costs from the published figure; some net certain expenses against income. Before comparing two banks an analyst rebuilds both ratios from the income statement on one definition.
In M&A the ratio is the language of the synergy case. A buyer of a bank or lender models the combined cost base after closing overlapping branches, merging technology platforms and removing duplicate functions, and presents the result as the ratio the enlarged group will reach. The integration costs of getting there are usually excluded from adjusted figures but are real cash, and belong in the valuation.
For a neobank the ratio tells a different story. Above 100% it loses money before a single loan defaults; the path down towards a mature bank's level as customer numbers grow is the investment case, and an investor tests it against cost per customer rather than headline growth.
Example
A regional bank has operating income of €900m and operating expenses of €630m: a cost-to-income ratio of 70%. A larger bank with income of €4.0bn and costs of €2.2bn (55%) buys it. The acquirer plans €150m of annual savings — closing 60 overlapping branches, moving the target onto its core banking platform, merging head-office functions — at a one-off integration cost of €300m. Combined income is €4.9bn and combined costs after savings €2.68bn: a ratio of 54.7%. If €30m of the target's income is lost as customers leave during the migration, the ratio is 55.0% and the case still holds. If the platform migration slips by a year, the savings arrive a year late and the payback on the €300m stretches from two years to three.
Common mistakes
- Comparing two banks' published ratios without checking what each one excludes. - Reading an improvement driven by higher interest rates as cost discipline. - Forgetting that provisions sit outside the ratio, so a low figure can coexist with a bad loan book. - Counting the synergies in the target ratio and leaving the integration costs out of the price. - Cutting technology spend to hit a ratio target, then paying for it in outages and a rebuild. - Judging a young neobank on today's ratio instead of the trend in its cost per customer.