A bank generates its income from three main sources.
1. There is the net interest rate difference between what it earns on loans and what it pays for deposits.
2. There are the extra fees it charges for various services and
3. There is the profit it earns from other activities like running a stockbroking division, a funds management business and offering services to customers like helping them with foreign exchange transactions.
Banks can also be involved as active traders in financial markets.
As far as the income they earn is concerned, this is generally about 3 per cent of the value of the multi billion dollars of assets for which they are responsible.
From this it pays running expenses that reduce the income on total assets to about 2 per cent.
Besides looking for a consistent mid- to high-teen ROE, it is good to see a high level of ROA as well.
For banks, a top ROA would be in the 1.2% to 1.4% range.
Related:
What should investors look for when investing in banks and other financiers?
http://myinvestingnotes.blogspot.com/2010/05/what-should-investors-look-for-when.html
1. There is the net interest rate difference between what it earns on loans and what it pays for deposits.
2. There are the extra fees it charges for various services and
3. There is the profit it earns from other activities like running a stockbroking division, a funds management business and offering services to customers like helping them with foreign exchange transactions.
Banks can also be involved as active traders in financial markets.
As far as the income they earn is concerned, this is generally about 3 per cent of the value of the multi billion dollars of assets for which they are responsible.
- About 2.4 per cent of this 3 per cent comes from interest income and
- about 0.6 per cent from fees and other income.
From this it pays running expenses that reduce the income on total assets to about 2 per cent.
The other major cost is allowing for bad debts, which can arise from people not being able to pay their interest as well as from losses on bank business enterprises.
- These expenses can range widely from 0.2 per cent of assets when times are good to more than 1 per cent during bad times.
Last but not least is tax which reduces any net income by 30 per cent.
From these basic observations, the major challenge banks currently face in developed countries comes from bad debts.
From these basic observations, the major challenge banks currently face in developed countries comes from bad debts.
Summary:
3 Main Sources of Income
(1) Interest Income = 2.4% of Total Assets
(2) Fees and (3) other Income = 0.6% of Total Assets
Total Income = 3.0% of Total Assets
less
Expenses = 1% of Total Assets
Profit before provisioning for bad debts and before tax = 2% of Total Assets
less
Provisioning for Bad Debts = 0.2% to 1% of Total Assets
Profit Before Tax = 1.8% - 1% of Total Assets
less
Tax = 30%
Profit After Tax = 1.26% - 0.7% of Total Assets
Besides looking for a consistent mid- to high-teen ROE, it is good to see a high level of ROA as well.
For banks, a top ROA would be in the 1.2% to 1.4% range.
Related:
What should investors look for when investing in banks and other financiers?
http://myinvestingnotes.blogspot.com/2010/05/what-should-investors-look-for-when.html
Comparative Analysis of Banking Stocks (16.5.2010)
How to analyze the market? Bank
http://myinvestingnotes.blogspot.com/2008/08/how-to-analyze-market-bank.html
Hallmarks of Success for Banks: ROE and ROA
http://myinvestingnotes.blogspot.com/2009/06/hallmarks-of-success-for-banks-roe-and.html
Hallmarks of Success for Banks: ROE and ROA
http://myinvestingnotes.blogspot.com/2009/06/hallmarks-of-success-for-banks-roe-and.html
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