What it is
Every bank has to pay its people and keep its branches open. Staff costs are usually the biggest part, then rent, software, security, marketing and depreciation of equipment.
Operating expenses do not include interest paid to depositors or provisions for bad loans; those have their own lines.
The key test is the cost-to-income ratio: operating expenses ÷ total operating income. Lower means leaner.
How it is calculated
Personnel expenses + other operating expenses + depreciation and amortisation, for the period.
Worked on Nabil Bank Limited, FY 2082/83 Q4
NABIL's operating expenses for FY 2082/83 were Rs 809.27 crore against total operating income of Rs 2,233.44 crore, a cost-to-income ratio of about 36.23%.
Operating expenses, the sum of the three printed lines: personnel expenses, other operating expenses, depreciation and amortisation.
What good looks like
Growing slower than income. A merger raises costs for a year or two before savings arrive. Heavy digital investment raises costs now and should lower them later.
Watch out
- Staff bonus in Nepal is a share of profit, so a good year raises costs automatically.
- Depreciation is a non-cash cost; it does not reduce cash the bank has.
- After a merger, duplicate branches push this line up.
In Nepal
Nepal's Bonus Act requires a portion of profit to be distributed to staff as bonus; it is booked under personnel expenses, so it moves with profit.
Questions
Mostly. But a bank that under-invests in technology or risk staff can look cheap today and pay for it later.
Two head offices, duplicate branches and staff integration. Savings usually arrive a year or two later.