Average bank cost-to-income ratios in Europe Q4 2021, 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 to a bank’s operating income. Lower ratios mean that a bank is running more profitably whereas a higher cost to income ratio indicate the banks operating expenses are too high. As of December 2021, the highest cost-to-income ratio is Europe was recorded in Malta.

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 to 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 running 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 banks profitability is to look at the return on assets (ROA), which divides a bank’s net income by its total assets during a given period.