Chinese, Indian banks' efficiency erodes as expenses outpace income: S&P

The operating efficiency of banks in India and Mainland China, measured by cost to income ratio, eroded in the year ended March 2024 due to rise in operating expenditure and pressure on margins, according to S&P Global Market Intelligence.

Indian banks' aggregate cost-to-income ratio rose to 57.08 per cent for the 12 months from 48.65 per cent and that of Chinese lenders’ went up to 33.13 per cent from 31.64 per cent. Bucking the trend, Singaporean and Japanese lenders posted minor gains as their cost-to-income ratio edged lower. Despite a rise in the median cost-to-income ratio, Mainland China is still home to several of the most efficient banks in Asia-Pacific, it added.

Dwelling on factors eroding operating efficiency, the S&P Global’s unit said In India, interest rates are widely believed to have peaked and are expected to fall. The Reserve Bank of India (RBI) held its policy rate steady for more than a year following a series of hikes since early 2022, putting pressure on Indian banks' margins.

Also, Indian lenders invested heavily in expansion, opening new branches, adding customers and boosting technology infrastructure to continue as the fastest-growing major economy in the world. These higher costs are also proving to be a drag on banks' efficiency.

It said lenders in Mainland China face pressure on their net interest margins (NIMs) as the People's Bank of China maintained an easing bias to support economic growth and help mitigate a downturn in the real estate sector, which accounts for 25% of the country's GDP. The central bank cut its five-year loan prime rate, the mortgage benchmark, to a record low of 3.95 per cent in February to boost home sales.

The median cost-to-income ratio of Japanese lenders improved to 61.84 per cent in the year ended March 31. The ratio remains highest in the region. The Bank of Japan ended its negative interest rate policy in March, with further rate hikes expected this year. Higher rates will improve banks' net interest margins by widening the gap between lending rates and borrowing costs, aiding improvement in the operating efficiency, it added.