Banks get their revenue from two main sources:
1. The interest from investments in treasury bills and bonds, and the interest from loans in local and foreign currencies.
2. Fees and commissions on banking services such as loan approval commissions, fees for opening and closing accounts, etc.
Practical Example:
CIB Income Statement in H1 2022
Revenues (in billion pounds)
1. Income from interest payments = 24
2. Income from fees and commissions = 2.4
3. Other income/profit = 2.1
Total income and profits = 28.5 billion
1 + 2 to the total = 93%
And in order for the bank to reap these revenues, it has to incur 4 types of costs other than taxes…
Expenses (in billions of pounds)
1. Interest payments to depositors = 10.6
2. Fees and commissions for other banks = 1.1
3. General and administrative expenses = 3.3
4. Allowance = 2.5
Total = 17.5 billion pounds
Summary
1. The difference between interest income and interest payments is big (13 billion pounds) because a large percentage of bank deposits (like most Egyptian banks) are in the form of current deposits that do not earn interest but only provide their owner with a safe place to save money and issue a checkbook.
In the case of CIB, the ratio of current deposits to total deposits was 35% at the end of June 2022. This is financing at a cost = zero
2. Of the 4 main expenses, the expense that can be classified as a fixed cost is the item of general and administrative expenses. Therefore, banks can be classified as companies characterized by a high degree of financial leverage, but a low degree of operating leverage.
3. Provisions to meet expected losses due to some clients not repaying the loans is one of the most significant components of a bank’s income statement.
Loan loss provisions are an amount that is set aside from revenue on a periodic basis to take into account “expected losses” from loans expected to default.
In other words, the bank admits the loss before the default event, and not after it, because the failure of customers to pay is a normal thing, and therefore the shareholders should not be deceived during a period and then informed at a later period.
You can say that the allocations = assessing the affliction before it occurs.
Bank Profitability Analysis
