Many experts said that in 2023, the global economy in general and Vietnam in particular still faces many potential challenges. Most banks have set lower profit growth targets than in previous years. They focus on ensuring safety indicators, asset quality and optimizing operational efficiency. In order to maintain growth, many banks said they would pay attention to effective cost management, control the growth rate of expenses to a lower rate than the growth rate of revenue to improve the cost-to-income ratio (CIR) .
Strong divergence between banks in terms of CIR
The financial statements for the first quarter of 2023 showed that many banks managed to improve their CIR, which greatly contributed to the positive results, despite the challenging market environment.
Similarly, at the Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank), good corporate results contributed greatly to good cost control. The bank’s total CIR achieved in the first quarter (Q1) of 2023 reached more than 17 trillion dong, up 20 percent from the same period of 2022, while operating expenses grew 12.9 percent to 4,314 trillion dong VietinBank’s CIR continued to improve from 27.2 percent to 25/3 percent. The bank’s net profit from business activities (before sourcing) reached more than 12.7 trillion dong, up 24 percent from the same period in 2022.
For Vietnam International Commercial Joint Stock Bank (VIB), total operating income in the first quarter of this year was 4.929 trillion dong, up 19.2 percent from the same period last year. Meanwhile, the bank’s operating costs were 1.567 trillion dong, an increase of 7.4%, and the CIR fell sharply from 35.3% in the same period of 2022 to 31.8% in the first quarter of 2023. Thanks to effective cost control, VIB’s net profit from business activities (before sourcing) was 3.362 trillion dong, up 25.6 percent from the same period in 2022.
Asia Commercial Joint Stock Bank (ACB) is also one of the banks that was able to reduce its CIR in the first quarter of this year (from 40% to 31.6%). The bank’s operating costs fell 8 percent over the same period of 2022 to 2.507 trillion dong, while operating income rose 15.6 percent to 7.920 trillion dong.
Statistics from the financial statements of 28 banks also showed that there is currently a significant divergence in the CIR. Effectively operating banks have their CIR around 30 percent like VIB, ACB, Vietnam Technological and Commercial Joint Stock Bank (Techcombank), Military Commercial Joint Stock Bank (MB), etc. In addition, in some banks, the operating costs account for almost half of their total income.
Not only in 2023, reducing the CIR is a long-term goal of banks. This is an important indicator that measures how the bank’s resources are used. The lower the CIR, the better. On the contrary, the higher level of this index means that operating costs are becoming a burden that reduces your profitability.
Digital transformation is key
In fact, reducing operating costs is very difficult because banks have to continually invest in expanding scale and increasing customer experience. So the problem is that banks have to find a way to make cost growth less than revenue growth, which is seen as optimizing operational efficiency. This requires a drastic reform of the banks’ operating model. In recent years, the organizational structure of banks has also moved towards neatness, along with programs to automate processes and improve digital transactions. That is also the reason why banks have poured a lot of capital into technological investment and consider digital transformation as one of the decisive keys to reduce CIR.
Usually, Tien Phong Commercial Joint Stock Bank (TPBank) has LiveBank, which provides basic services of a transaction office. Automated transaction points require much lower investment and operating costs than traditional transaction offices, but are still highly efficient, can reach many users, and operate 24/7.
VIB is a pioneer in applying AI, biometrics and many other prominent technologies like cloud-native augmented reality (AR), etc. to enhance customer experience. Heavy early-stage technology investment has helped the bank rapidly expand its retail segment. The transaction rate in the digital channel at VIB is currently 93%. Meanwhile, the cost for each transaction through the digital bank is much lower than that of a transaction office.
Digital transformation also helps improve employee productivity, reduce paperwork, and shorten processes. Instead of recruiting massively as in the past, banks now focus on staff training and talent attraction to improve the productivity of each employee.
However, the CIR can increase when banks need to invest in technology, infrastructure and manpower to fuel their growth. If this investment is effective, the CIR will be low in the long term, which is an engine for the bank’s sustainable growth.