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Profitability of A Bank

Explore the crucial areas of leverage, balance sheet, credit risk, and interest rate risk in banking for optimum profitability. Learn how to adapt to market changes to ensure financial success.

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Profitability of A Bank

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  1. Profitability of A Bank

  2. Introduction • In the highly competitive financial market, it is imperative that banks analyze each line of business in order to maximize profits. • In this presentation, a brief overview of three areas of concentration will be given.

  3. LEVERAGE AND RISK • BALANCE SHEET • For customers, the bank sends out a monthly statement showing all activity on each customer’s accounts. • A financial institution also has a monthly statement, the balance sheet, that is reviewed by all parties involved.

  4. BALANCE SHEET EXAMPLES

  5. Figure 3: Average Balance and Interest Rates

  6. CREDIT RISK • Simply defined as the potential that a borrower will fail to meet its obligations. • To absorb losses like this, a bank will keep an “allowance” for loan and lease losses. • These losses are written off and are replenished through the “provisions” set aside.

  7. Credit Risk Balance Sheet Example

  8. INTEREST RATE RISK • Interest earned from loans • greater than • interest paid on deposits • The total of this equation is a major factor of profitability.

  9. Market • The economic market will change. • With each change, the financial institutions must adjust in order to remain profitable. • Keeping up-to-date records of assets and liabilities is a day to day process.

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