The efficiency ratio is more than just a financial buzzword—it’s a crucial metric that reveals how well a business, especially banks and financial institutions, manages its operating costs relative to its income. With the Australian banking sector facing pressure to streamline in 2025, understanding and optimising this ratio is more important than ever.
What Is the Efficiency Ratio?
In simple terms, the efficiency ratio measures the cost of generating each dollar of revenue. It’s typically used in banking, but its principles apply to any business keen to keep costs under control while boosting productivity.
- Definition: The efficiency ratio compares operating expenses to net revenue, showing how much it costs to earn one dollar.
- Formula: Efficiency Ratio = (Operating Expenses / Net Revenue) × 100
- A lower ratio means higher efficiency. For example, a 50% ratio means it costs $0.50 to make every $1.00 of revenue.
In 2025, as digital transformation and regulatory reforms reshape the finance sector, this ratio is a frontline metric for both investors and managers.
Why the Efficiency Ratio Matters in 2025
Australian banks and businesses are navigating a changing landscape this year. The Reserve Bank of Australia’s push for greater cost transparency, coupled with ongoing digitisation, has put cost management under the spotlight. Here’s why the efficiency ratio is front and centre:
- Shareholder Scrutiny: With shareholders demanding better returns, banks are under pressure to justify every dollar spent.
- Regulatory Changes: APRA’s 2025 reporting standards require more granular breakdowns of operational costs, making efficiency ratios a key performance indicator.
- Digital Disruption: The adoption of AI, open banking APIs, and process automation is driving down costs for some, but initial investments can spike expenses if not managed well.
- Competitive Edge: Challenger banks and fintechs often boast leaner operations, reflected in lower efficiency ratios, putting pressure on incumbents to adapt.
For example, in 2025, Commonwealth Bank reported an efficiency ratio of 42%, down from 45% in 2024, reflecting successful cost-cutting and digital streamlining. In contrast, some regional banks saw their ratios rise above 60% due to legacy IT upgrades and compliance costs.
How to Calculate and Interpret the Efficiency Ratio
The calculation is straightforward, but the interpretation requires context. Here’s how you can break it down:
- Identify Operating Expenses: These include salaries, rent, tech investments, and day-to-day running costs.
- Find Net Revenue: For banks, it’s total income (interest + non-interest) minus provisions for loan losses.
- Plug Into the Formula: Divide expenses by revenue and multiply by 100 for a percentage.
Example (2025):
- Operating Expenses: $1.2 billion
- Net Revenue: $2.8 billion
- Efficiency Ratio: ($1.2B / $2.8B) × 100 = 42.86%
A ratio below 50% is generally considered strong in banking, but the ideal benchmark can vary by sector and business model. In 2025, APRA guidance suggests that banks with ratios above 55% should present a remediation plan, reflecting the new regulatory focus on operational efficiency.
Strategies for Improving the Efficiency Ratio
Optimising this ratio isn’t just about ruthless cost-cutting. It’s about strategic investment and smart operations. Here are some approaches gaining traction in 2025:
- Digital Transformation: Automating back-office functions and customer service with AI reduces headcount and error rates.
- Process Simplification: Reviewing workflows to eliminate redundancies—often revealed through process mining tools—can trim expenses fast.
- Data-Driven Decision Making: Analytics platforms help pinpoint underperforming segments or channels, targeting cost-reduction where it matters.
- Partnering with Fintechs: Outsourcing non-core services or leveraging fintech solutions can boost efficiency without massive capital outlays.
For instance, Bendigo and Adelaide Bank’s 2025 annual report highlighted a 3% drop in its efficiency ratio after adopting a cloud-based core banking system, despite initial implementation costs.
Conclusion
The efficiency ratio remains a vital yardstick for measuring operational performance and cost control. With 2025’s regulatory shifts and digital opportunities, it’s a key metric for boards, investors, and managers alike. Whether you’re tracking your own business or analysing your bank’s quarterly results, understanding this ratio—and how to improve it—will help you stay competitive in a rapidly evolving financial landscape.
