UK banks are coming under pressure to slash costs as low interest rates continue to squeeze margins. Operational efficiency in banking is commonly highlighted by cost/income ratios – that is, the ratio of total operating costs (excluding bad and doubtful debt charges) to total income (the sum of net interest and non-interest income).
In today’s business environment, where banks require rigorous efficiency to remain profitable, Lloyds Banking Group’s aim is to become simpler and more efficient.
According to Lloyds’ 2016 annual report, its cost/income ratio fell 6 basis points to 48.7%. When contrasted with HSBC and Barclays, which both recently reported cost/income ratios in excess of 60%, this demonstrates the advantage of Lloyds’ simple, low-cost retail and commercial banking business model. With its current momentum Lloyds Bank is targeting a cost/income ratio of 45% in 2019.
If we closely observe movements in Lloyds Bank’s operating costs, it seems costs are tightly managed each year. 2016 costs were 3% lower than in 2015 and 20% lower than in 2010, despite investment in the business. The low costs were driven by simplification savings and lower run-offs, partly offset by increased investment in the business and inflation.
Lloyds’ superior cost/income ratio provides it with a competitive advantage over other players. As pressures on efficiencies continue, other banks in the UK must move beyond tactical cost reduction if they want to catch the market leader.
By Resham Karira, Retail Banking Analyst