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Cost-to-income ratio of PSBs at a decade high

Flat to negative growth in net interest incomes — the difference between interest earned and interest expended — combined with rising operating expenses has meant that the cost-to-income ratio of public sector banks has hit its highest in over a decade.

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In other words, PSBs are now spending more money to earn every single rupee than they ever did in the last decade

Flat to negative growth in net interest incomes — the difference between interest earned and interest expended — combined with rising operating expenses has meant that the cost-to-income ratio of public sector banks has hit its highest in over a decade.

In other words, PSBs are now spending more money to earn every single rupee than they ever did in the last decade.

This, at a time when the same for private sector banks has hit its lowest in over five years, thereby highlighting the point that the woes of PSBs won’t necessarily end with RBI’s asset quality review (AQR).

PSB

Data compiled by FE reveals that while the cost-to-income ratio of all listed PSBs has risen to 52.96% in Q3FY16 – the highest since Q2FY06 – the same for all private sector banks for which five-year data is available has fallen to a new low of just 40.81%.

When it comes to individual banks, while Dena Bank is the most inefficient PSB with the highest cost-to-income ratio in Q3FY16 of 74.99%, ICICI Bank is the most efficient private sector bank with a cost-to-income ratio of 32.16%.

Just how big the difference between the two is can be validated by the fact that while employee expenses accounted for 13.2% of Dena Bank’s total income in Q3FY16, the same was just 6.5% for ICICI Bank.

Interestingly, there’s not a single PSB which had a lower cost-to-income ratio than the same for all private sector banks put together, the closest one being Andhra Bank, which had a cost-to-income ratio of 40.82% in Q3FY16.

Simply put, if cost-to-income is considered as the efficiency barometer, then in Q3FY16, not a single PSB was more efficient than the average private sector bank.

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