Branch Profitability and the Cost-to-Income Trap
A retail bank operates 60 branches. Aggregate net interest income is GHS 320m and non-interest income is GHS 90m. Operating expenses are GHS 300m, of which GHS 180m is fixed (rent, core staff) and GHS 120m is variable with transaction volume. Impairment charges are GHS 45m. Management is reviewing 12 'underperforming' branches that together generate GHS 40m revenue and GHS 38m of directly attributable operating cost, of which GHS 22m is fixed. Closing a branch typically loses 60% of its deposits to competitors and 30% of its loan customers, and carries a one-off closure cost of GHS 6m per branch. The bank's cost-to-income ratio target is 55%.
1. Compute the bank's current cost-to-income ratio and assess whether it meets the 55% target.
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Cost-to-income ratio (CIR): Operating expenses / operating income.
- Operating income = NII 320 + non-interest 90 = GHS 410m
- Operating expenses = GHS 300m
- CIR = 300 / 410 = 73.2%
This is 18.2 percentage points above the 55% target. To reach 55%, operating expenses must fall to 0.55 × 410 = GHS 225.5m - a reduction of GHS 74.5m, or a 24.8% cut in opex. Alternatively, income must rise to 300 / 0.55 = GHS 545.5m, a 33% increase.
Judgement: The gap is large; closing 12 branches alone will not close it. Note impairment (GHS 45m) sits below the line for CIR but still consumes profit - the bank's real economics are worse than the CIR suggests.
2. Evaluate the case for closing the 12 underperforming branches.
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Direct branch economics: Revenue 40m − directly attributable cost 38m = GHS 2m contribution. On the surface, marginal.
But closure destroys revenue: Losing 60% of deposits and 30% of loan customers removes a large share of that GHS 40m revenue. If revenue falls ~45%, the bank loses ~GHS 18m of income while saving only the GHS 22m fixed cost (variable cost disappears with the volume anyway). Net effect ≈ 22 − 18 = GHS 4m saving, before one-off closure costs of 12 × 6m = GHS 72m.
Payback: GHS 72m one-off against GHS 4m annual saving = 18-year payback. That is value-destructive.
Judgement: Do not close on cost grounds alone. The fixed cost is largely unavoidable in the short term (leases, redeployment). Better levers: renegotiate leases, convert some branches to lower-cost formats, cross-sell to lift revenue, and address the GHS 120m variable cost via digital migration. Closing destroys the deposit franchise that funds the balance sheet.