For much of the last few years, stronger net interest income helped many banks absorb a cost base that remained heavier than management teams would have liked. That cushion is becoming less reliable. The ECB’s latest supervisory results show that euro area banks stayed profitable into 2025, but cost pressures intensified even as the aggregate cost-to-income ratio improved to 54.9% in 2024 and then broadly stabilized in 2025. In the United States, FDIC-insured institutions reported a 1.26% return on assets in the first quarter of 2026, yet noninterest expense rose 7.1% year over year while net interest margin moved down to 3.31%. Across countries, the IMF’s Financial Soundness Indicators also show that bank profitability has risen since 2021, but that does not remove the pressure to protect earnings quality as revenue conditions normalize. [1]
That is why the cost-to-income ratio has moved back to the center of banking strategy. It is no longer just a retrospective measure in an investor presentation. It is increasingly a forward-looking test of whether a bank can self-fund technology modernization, absorb regulatory and control costs, preserve shareholder returns, and still maintain enough flexibility to grow. BIS research links stronger profitability to stronger valuation and larger management buffers above regulatory requirements, underscoring that efficiency is not merely about cost cutting; it is closely tied to resilience. [2]
The banks most likely to improve from here are not simply those reducing headcount or closing branches. They are usually the ones simplifying products, redesigning end-to-end processes, tightening service models, eliminating duplicate technology, and being more disciplined about where human expertise truly adds value. McKinsey notes that earlier waves of efficiency programs often delivered only short-lived gains, but also argues that simplification at scale can create the capacity to invest in core priorities such as data, cyber, modernization, and AI. That matters because banks now have to improve efficiency while still meeting high expectations for resilience and control. [3]
In that sense, the economics of banking efficiency have changed. The question is no longer whether banks should care about their cost-to-income ratio. The real question is whether they can materially improve it without weakening the very capabilities that define a durable banking franchise.
The renewed attention on cost-to-income is not hard to understand. In Europe, banks have benefited from stronger net interest income, but the ECB has been explicit that staff and administrative costs remain an important source of pressure. In its aggregated 2025 SREP results, the ECB said operating expenses rose by 2.5% in 2024, largely because of staff and other administrative expenses, while the cost-to-income ratio improved only because income grew faster than costs. In the first half of 2025, the ratio stayed broadly stable rather than continuing to fall in a meaningful way. [4]
The US picture tells a similar story in different language. The FDIC’s first-quarter 2026 Quarterly Banking Profile showed that quarterly earnings improved, but part of that gain was offset by higher noninterest expenses and lower net interest income. Salaries and employee benefits were a major driver of expense growth, and the industry’s net interest margin fell because asset yields declined faster than funding costs. That combination is exactly the kind of environment in which cost-to-income becomes more revealing. When revenue tailwinds soften, fixed costs become more visible. [5]
The ratio matters because it is one of the clearest snapshots of how efficiently a bank converts operating revenue into earnings capacity. It cannot tell management everything by itself, but it is a direct indicator of whether a franchise is generating enough income to support people, processes, systems, controls, and investment without eroding returns. The ECB’s data architecture treats cost-to-income as a formal profitability item in consolidated banking data, which shows how central the measure has become in supervisory and analytical practice. [6]
It is also a ratio that has to be read in context. BIS research on business models shows that banks with commercial banking models, especially those supported by retail funding, have historically exhibited lower cost-to-income ratios and more stable returns on equity than trading-led models. In other words, the ratio is not just a verdict on management discipline. It also reflects structural choices about franchise design, funding mix, asset mix, and revenue composition. [7]
That is one reason why the measure matters more now than in past cycles. It sits at the intersection of strategy, balance sheet structure, and execution. A weak ratio may be caused by waste, but it may also point to a larger issue: a bank could be carrying a business model that no longer matches market conditions as well as it once did.
What Is Changing the Ratio Now
The biggest change is that the numerator and denominator are both under pressure at the same time.
On the revenue side, the easy part of the recent cycle is fading. The IMF’s recent data brief shows that bank profitability has improved across most reporting countries since 2021, while the ECB and FDIC both show that earnings have remained healthy into 2025 and 2026. But profitability supported by favorable rate conditions is not the same as structurally efficient profitability. Once margins flatten or soften, banks are forced to confront how much operating leverage they really have. [8]
On the cost side, the pressure is broad rather than narrow. Staff costs remain sticky. Technology costs are not disappearing; they are shifting toward cloud, cybersecurity, data infrastructure, controls, and AI experimentation. Compliance and risk workloads also remain substantial. McKinsey warns that many efficiency programs fail to hold because costs reappear elsewhere, often as new priorities absorb the savings. That observation feels especially relevant now, when banks must modernize while also preserving resilience and customer experience. [3]
A third change is that customers increasingly expect better service from a cost base that management teams are trying to shrink. Faster onboarding, fewer errors, simpler journeys, and more personalized support all require process discipline and cleaner data. Banks can no longer assume that cost reduction and customer experience are opposites. In many cases, the same redesign that lowers rework and handoffs also produces a better client outcome. This is why the industry conversation has shifted from “cutting expenses” to “simplifying operations.” [9]
A fourth change is that the ratio is becoming more strategic because capital markets and supervisors both care about the quality of profitability. BIS research shows that higher expected profitability and greater capital headroom above regulatory requirements are strongly associated with better market valuation among large global banks. That has an important implication: a bank that improves its cost-to-income ratio in a durable way is not merely improving optics. It may also be improving its ability to build buffers, support growth, and strengthen investor confidence. [2]
Finally, the ratio is becoming more important because banking models are diverging. BIS work on business models found that retail-funded commercial banks tended to post lower cost-to-income ratios and more stable returns than trading-led models, and that shifts toward retail-funded banking after the global financial crisis were associated with better relative profitability. In practical terms, that means boards cannot look at efficiency in isolation from funding and franchise strategy. A bank with a more stable deposit-led model may still be inefficient, but it starts from a more favorable economic base than one carrying a heavier, more volatile market-facing model. [7]
How Banks Are Responding with Technology and Operating Model Change
The most credible response has been simplification. McKinsey’s recent work on banking productivity argues that previous efficiency drives often delivered only modest and temporary gains, but that more substantial improvement comes when banks simplify products, journeys, and internal structures at scale. That means reducing unnecessary variation, eliminating duplicate platforms, narrowing exception paths, and redesigning work rather than merely asking the same teams to work faster. [9]
In practice, that usually starts with a hard question: where does complexity create value, and where does it simply create work? Many banks still have too many products, too many manual reviews, too many handoffs between front office and operations, and too many legacy workflows wrapped around old systems. A clean cost-to-income improvement often comes not from one major transformation, but from hundreds of smaller choices to standardize and remove friction. [9]
The following examples are anonymized composites based on public industry patterns rather than named bank disclosures. They reflect how many institutions are approaching the problem.
One composite example is a large universal bank in a mature market that found its revenue line still healthy but its operating base too layered. The initial response was a traditional review of headcount and suppliers, but the bigger improvement came only after the bank consolidated overlapping customer journeys, simplified product variants, and reduced internal approval steps that had built up over time. This kind of result is consistent with the ECB’s evidence that staff and administrative expenses remain a major driver of cost pressure, even when income is strong. [10]
A second composite example is a regional lender that focused less on big-ticket restructuring and more on operational throughput. It used more disciplined triage in servicing, standardized documentation in lending and onboarding, and clearer workflow ownership in back-office functions. The goal was not simply to remove labor, but to reduce rework and shorten cycle times. In an environment where the FDIC reports both higher noninterest expense and lower net interest margin pressure, these sorts of operational gains can protect earnings quality even without dramatic revenue growth. [11]
A third composite example is a bank that reassessed where it wanted to compete. Instead of trying to maintain a broad mix of lower-return activities, it leaned further into a retail-funded, relationship-led franchise and narrowed capital allocation elsewhere. BIS research suggests that this kind of model clarity matters: retail-funded commercial banking models have tended to show lower cost-to-income ratios and steadier returns than more trading-oriented structures. [7]
Technology remains an important lever, but only when it is tied to process change. McKinsey points to productivity potential in call-center operations, credit memo writing, fraud and dispute handling, analytics, and software development. The common thread is not that AI replaces banking judgment. It is that technology handles repetitive work, surfaces information faster, and lets scarce human attention move toward higher-value decisions and customer interactions. [9]
Still, there is a discipline to this. Not every technology expense improves the ratio in the near term. Some investments initially raise costs before they lower them. That is why the most effective banks increasingly think in terms of sequencing: simplify first, automate second, scale third. If automation is layered on top of broken processes, the bank often ends up preserving complexity in digital form. If simplification comes first, the cost-to-income benefit is more likely to last. [9]
Why Regulation, Capital, and Benchmarking Matter
A bank’s cost-to-income ratio is not a formal prudential requirement, but it has important prudential consequences.
The first is internal capital generation. BIS research on global systemically important banks finds a tight relationship between profitability, valuation, and resilience. Higher expected return on equity and a larger management buffer above regulatory requirements are associated with higher price-to-book ratios, while weaker franchises often protect buffers by shrinking risk-weighted assets rather than by expanding through profitable growth. For boards and investors, that makes efficiency a balance-sheet issue as much as an operating issue. [2]
The second is operational resilience. The Basel Committee’s Principles for operational resilience make clear that banks should strengthen their ability to withstand operational risk events and that resilience has to be supported by an institution’s overall approach to risk management. That matters for efficiency programs because badly designed cost reduction can under-resource controls, technology maintenance, or recovery capabilities. In banking, a lower cost base is only genuinely better if the franchise remains dependable under stress. [12]
The third is management quality. Supervisors increasingly look beyond current profitability to whether earnings are sustainable after costs, risks, and control obligations are fully recognized. The ECB’s SREP results show why this matters. Euro area banks remain profitable and well capitalized, but the supervisory narrative still highlights cost pressures, business model differences, and the need for continued discipline. Put differently, a good ratio buys room, but it does not buy complacency. [4]
Benchmarking must therefore be done carefully. The ECB’s data portal gives standardized cost-to-income series across EU banking groups, and the FDIC’s Quarterly Banking Profile provides a broad, current view of income, expenses, margins, capital, and other industry indicators for insured US institutions. The IMF’s bank profitability brief, built from Financial Soundness Indicators, offers a broader cross-country backdrop. Together, these sources remind banks that a ratio is less useful in isolation than in comparison: against peers, against one’s own business model, and against a multi-year trend. [13]
The most useful benchmark is rarely a single number. A better approach is to read cost-to-income alongside return on assets, return on equity, net interest margin, cost of risk, fee contribution, digital adoption, service levels, and control outcomes. That is how management can distinguish between a bank that is truly becoming more productive and one that is simply spending less for a while.
Outlook and Conclusion
The next phase of banking efficiency is likely to be less dramatic and more demanding. Revenue growth may still be respectable in many institutions, but it is less likely to conceal weak operating discipline. The ECB’s recent data show that euro area bank profitability remains solid while cost pressure persists. The FDIC’s current profile shows healthy earnings in the United States, but also highlights the pressure of rising noninterest expenses and a lower margin. These are not signs of distress. They are signs that the easy part of the cycle is passing. [14]
That shift will separate temporary efficiency from lasting efficiency. Temporary efficiency comes from hiring pauses, travel cuts, or project deferrals. Lasting efficiency comes from a smaller and better-designed operating machine. McKinsey’s view that simplification creates the surplus cash to fund modernization feels especially relevant in this setting, because banks now have to improve cost performance and upgrade capability at the same time. [9]
The institutions best placed for the next few years are likely to share a few characteristics. They will know which businesses deserve capital and which do not. They will treat data quality and process design as operating priorities rather than technical side projects. They will use technology to reduce friction, not just to add new interfaces. And they will resist the temptation to make cost cuts that weaken resilience. BIS guidance and research both point to the same conclusion: profitability, buffers, and operational strength reinforce one another when managed well. [15]
That is why cost-to-income ratios matter more than ever. They are not simply a measure of thrift. They are a measure of whether a bank’s business model, operating model, and investment model still fit together. In a slower, more disciplined era for revenue growth, that may be one of the most important economics questions in banking.
FAQs
What is the cost-to-income ratio in banking?
It is a profitability indicator that compares a bank’s operating costs with its operating income, showing how efficiently revenue is converted into earnings capacity. The ECB treats it as a core profitability measure in consolidated banking data. [6]
Why does the cost-to-income ratio matter so much now?
Because strong margins no longer hide inefficiency as easily as they did when net interest income was expanding faster. Recent ECB and FDIC data show that cost pressures remain material even while profits stay healthy. [14]
Is a lower cost-to-income ratio always better?
Usually lower is better, but not in a simplistic sense. A bank can cut costs too aggressively and weaken service, controls, or resilience, which is why regulators emphasize sound operational capability alongside financial performance. [12]
How is cost-to-income linked to profitability?
Higher efficiency supports stronger returns, and BIS research shows that profitability is closely linked with valuation and management buffers above regulatory requirements. [2]
Does the ratio differ by business model?
Yes. BIS research shows that commercial banking models, especially retail-funded ones, have tended to show lower cost-to-income ratios and more stable returns than trading-led models. [7]
Can a bank improve the ratio without large-scale layoffs?
Yes. Many improvements come from simplification, standardization, better workflow design, and removing duplication rather than from labor cuts alone. McKinsey argues that durable gains usually come from redesigning complexity out of the bank. [9]
What role does technology play in improving banking efficiency?
Technology can improve productivity in service operations, credit work, fraud management, analytics, and software development, but it works best when paired with process redesign. [9]
Can AI materially improve cost-to-income ratios?
It can help, especially in repetitive, document-heavy, or data-intensive tasks, but it is not a stand-alone solution. The gains tend to be strongest where banks first simplify the underlying process. [9]
Why should boards care about this ratio?
Because it influences earnings quality, investment capacity, buffer generation, and long-term franchise resilience. It is a strategic indicator, not just a finance metric. [16]
How should banks benchmark cost-to-income performance?
They should compare against relevant peers and read the ratio alongside returns, margins, cost of risk, and operating trends. ECB and FDIC datasets are useful for building that broader view. [17]
Is cost-to-income the same as the efficiency ratio?
In practice, many market participants use the terms in a closely related way, though definitions can vary by jurisdiction and reporting framework. That is why banks should always compare like with like when benchmarking. [17]
How often should management review the ratio?
Frequently enough to catch trend changes early. Supervisory and industry reporting is often quarterly, but internally many banks monitor the drivers of the ratio much more often through management dashboards. [14]
What are the strongest leading indicators behind a worsening ratio?
Persistent staff-cost inflation, falling margin, growing manual work, weak fee momentum, and repeated process exceptions are common warning signs. Recent ECB and FDIC reports show how expense growth and margin pressure can combine to weaken efficiency. [14]
Will cost-to-income ratios stay a major banking theme over the next few years?
Very likely. As profitability normalizes and investment needs remain high, banks will need stronger operating leverage to sustain returns and fund modernization. [18]
Which verified live sources were used in this report?
Bank for International Settlements research on business models, profitability, and resilience; Basel Committee principles on operational resilience; ECB aggregated 2025 SREP results and ECB profitability data; IMF bank profitability data brief; FDIC Quarterly Banking Profile for first quarter 2026; and McKinsey analysis on banking simplification and productivity. [19]
[1][4][10][14] Aggregated results of the 2025 SREP
[2][15][16] Profitability, valuation and resilience of global banks - a tight link
https://www.bis.org/publ/work1144.htm
[3][9] How banks can boost productivity through simplification at scale | McKinsey
[5][11] Quarterly Banking Profile - First Quarter 2026
https://www.fdic.gov/quarterly-banking-profile/quarterly-banking-profile-first-quarter-2026.pdf
[6][13][17] Profitability | ECB Data Portal
https://data.ecb.europa.eu/data/concepts/profitability
[7][19] Bank business models: popularity and performance
https://www.bis.org/publ/work682.htm
[8][18] IMF Data Brief: Financial Soundness Indicators and Coordinated Direct Investment Survey
https://data.imf.org/en/News/12225Bank%20Profitability%20Increases%20Globally
[12] Principles for operational resilience
