Cost-to-Income Ratio: Performance of Nigerian Big Banks

• GTCO Leads in Efficiency: Guaranty Trust Holding Company (GTCO) Plc recorded the lowest cost-to-income ratio (CIR) at 16% in Q1 2024, significantly down from 42% in Q1 2023, driven by a sharp rise in operating income.
• Zenith Bank’s Strong Performance: Zenith Bank Plc’s CIR dropped from 51.3% to 34.9%, showcasing effective cost management and strong income generation capabilities.
• UBA and FBN Holdings Improve: United Bank for Africa (UBA) Plc and FBN Holdings Plc also saw notable reductions in their CIRs to 57.8% and 47.1% respectively, reflecting enhanced operational efficiency despite rising operating expenses.

Performance of Nigerian Big Banks in Cost-to-Income Ratio

In the first quarter of 2024, some of Nigeria’s largest banks demonstrated notable efficiency in managing their costs amid rising inflationary pressures. The cost-to-income ratio (CIR) of these banks, a key indicator of profitability and efficiency, showed a decline compared to the same period in the previous year.

Understanding Cost-to-Income Ratio (CIR)

CIR is a critical financial metric that assesses the efficiency of a bank’s operations. It is calculated by dividing the operating expenses by the operating income (net interest income plus other income). A lower CIR indicates higher efficiency and profitability, as it means the bank is spending less to generate each unit of income.

Performance Overview

1. United Bank for Africa (UBA) Plc
   • Q1 2024 CIR: 57.8%
   • Q1 2023 CIR: 61.1%
   • Operating Expenses: N218.9 billion (up 104% from N107.3 billion)
   • Operating Income: N378 billion (up from N175 billion)
2. Zenith Bank Plc
   • Q1 2024 CIR: 34.9%
   • Q1 2023 CIR: 51.3%
   • Operating Expenses: N201.8 billion
   • Operating Income: N103.4 billion
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3. Access Holdings Plc
   • Q1 2024 CIR: 55.3%
   • Q1 2023 CIR: 59.9%
   • Operating Expenses: N279.3 billion (up 66.5% from N149.7 billion)
4. FBN Holdings Plc
   • Q1 2024 CIR: 47.1%
   • Q1 2023 CIR: 66.5%
   • Operating Expenses: N208.1 billion
5. Guaranty Trust Holding Company (GTCO) Plc
   • Q1 2024 CIR: 16%
   • Q1 2023 CIR: 42%
   • Operating Expenses: N99.3 billion (up 76.7% from N127.5 billion)
   • Operating Income: Significant increase contributing to a sharp drop in CIR

Analysis of Results

UBA Plc: Despite a 104% increase in operating expenses, UBA’s CIR decreased to 57.8%, indicating improved efficiency. The significant rise in operating income played a crucial role in this performance. Analysts attribute the rise in operating expenses to cost-of-living adjustments, inflationary pressures, and increased regulatory costs due to a larger balance sheet.

Zenith Bank Plc: Zenith Bank showcased a substantial drop in CIR from 51.3% to 34.9%. The bank’s ability to maintain a lower CIR reflects its strong income-generating capabilities and effective cost management strategies.

Access Holdings Plc: Access Holdings experienced a decline in CIR to 55.3%, indicating improved operational efficiency. The bank’s operating expenses increased by 66.5%, but this was offset by a higher increase in operating income.

FBN Holdings Plc: FBN Holdings saw a significant reduction in its CIR from 66.5% to 47.1%. This improvement highlights the bank’s successful cost management and enhanced revenue generation.

GTCO Plc: GTCO recorded the lowest CIR among the tier-one banks, dropping sharply to 16% from 42%. This remarkable efficiency was driven by a significant increase in operating income, despite a 76.7% rise in operating expenses. GTCO’s ability to generate high income with minimal cost expenditure set a benchmark for efficiency in the sector.

Profitability and Market Impact

GTCO emerged as the most profitable bank in the first quarter of 2024, with an after-tax profit of N457.1 billion, a significant increase from N58.1 billion. Zenith Bank followed with a profit of N258.3 billion, up from N66 billion. FBN Holdings reported N208.1 billion in profit, while Access Holdings and UBA recorded N159.2 billion and N142.5 billion, respectively.

Analyst Insights

Gloria Fadipe, a bank analyst at CSL, emphasized that a low CIR is advantageous for banks, indicating that costs are much lower compared to revenue. Aminu Dalhat, a financial analyst, further explained on social media platform X that the CIR measures the efficiency of a bank in managing its expenses relative to its income, highlighting how much a bank spends to generate a unit of income.

The performance of these Nigerian banks in managing their CIR reflects their resilience and efficiency in a challenging economic environment marked by inflationary pressures. The improvements in CIR underscore the banks’ strategic efforts to optimize costs and enhance profitability, ensuring their competitiveness in the financial sector.