Digital transformation helps many banks optimize costs.

A bank's cost-to-income ratio (CIR) shows what percentage of its total revenue the bank's total operating expenses account for. The lower the CIR, the more efficient the bank is, saving money to generate revenue.

A recent report on the banking industry by VPBank Securities Research said that the CIR ratio of the entire industry in the second quarter of 2024 was at 31.7 percent - flat compared to the previous quarter but has decreased sharply in just three years after banks have participated in comprehensive digital transformation and cut costs.

Financial statements of 29 banks show that about 20 banks have improved their CIR in the first half of 2024 compared to the same period in 2023. Of which, SHB, although slightly increasing by nearly 2 percent, still maintains its position as the bank with the lowest CIR ratio in the industry at 22.3 percent. VPBank ranked 2nd with a CIR of 23 percent, down by 5.2 percentage points compared to the first half of the previous year due to a 17.5 percent increase in total operating income in the first 6 months, while total operating expenses decreased by 4.28 percent. Next are VietinBank, Techcombank, LPBank, Vietcombank, MB, MSB...

But in terms of the increase, banks such as VIB, OCB, ABBank, PGBank, Sacombank, Saigonbank... all had an increase in CIR ratio in the first half of the year, in which Saigonbank increased the most by more than 10 percent compared to the same period last year. Banks with high CIR ratios include NCB, BVBank, Bac A Bank, Vietbank, Kienlongbank... when up to 50-90 percent.

According to experts, the improving trend of banks' operating costs reflects the stability and challenges of the economy in the first half of 2024. In particular, explaining the profit results in the first half of the year, many banks said they had to face pressure from increased operating costs due to the impact of interest rate cuts to support the economy, affecting the net interest margin (NIM) of many banks.

Not only that, although digital transformation brings many benefits, in the early stages, banks must also invest in technology and innovation to provide online banking services and utilities to customers.

Experts from Vietcombank Securities Company (VCBS) commented that investment costs for technology are still in a strong growth cycle to increase competitiveness and meet new, stricter regulations on security and safety in payment activities.

In addition, some other concerns also affect the cost optimization of banks, that is, the non-interest income of many banks has decreased, especially the income from cross-selling insurance.

Moreover, recently, the State Bank has issued a circular to add letters of credit (L/C) to credit activities, not accounting for service fees, which also reduces the non-interest income of banks providing many services related to import and export.

However, the fiercely competitive business environment has forced banks to focus on effective cost management to ensure sustainable growth. Therefore, in addition to cutting operating costs, banks also cut risk provisioning costs in the context of increasing bad debts.

According to VPBankS Research, banks generally reduce the increase in operating costs compared to the increase in total operating income to curb the increase in CIR, but still need to maintain a moderate level to motivate bank employees to promote outstanding loans, so it is expected that the banking industry's CIR will be flat in the second half of 2024.

Sharing more about the motivation to optimize capital costs, VCBS believes that, in the context of the mobilization interest rate environment being under pressure to increase again, the group of private banks with advantages in non-term deposits (CASA) and flexibility in capital mobilization activities (with a not too high level which is depending on customer deposits) will have a lot of potential to optimize capital costs, thereby improving profits.

Regarding non-interest income, revenue sources from fees, VCBS expects that some banks can record unusual income from upfront fees of insurance cross-selling contracts, profits from selling subsidiaries or recovering bad debts that have been written off...