4 ms·

https://www.investopedia.com/ask/answers/052515/what-average-profit-margin-company-banking-sector.asp https://www.investopedia.com/ask/answers/052515/what-avera

https://www.investopedia.com/ask/answers/052515/what-average-profit-margin-company-banking-sector.asp https://www.investopedia.com/ask/answers/052515/what-average... This article claims that banks make 24%, and they are hardly a monopoly. It also claims the overall average is 8.5%.

brownbat 7y ago
I can't figure out where that article gets its numbers from or which banks it's referring to. The industry standard measure for bank profitability is something called ROA, return on assets, and it's an extensively studied academic topic, with the general consensus that an ROA greater than 1% is pretty good. https://greyhouse.weissratings.com/ROA-ROE-and-What-These-Key-Measures-Mean-for-YOUR-Bank https://greyhouse.weissratings.com/ROA-ROE-and-What-These-Ke... https://www.fdic.gov/regulations/resources/cbi/report/cbi-roa.pdf https://www.fdic.gov/regulations/resources/cbi/report/cbi-ro... I'm sure there are some large institutional players that do consistently better than 1%, maybe up around 5 or 7. But a longstanding industry with a sustained 24% returns would... sustained compounding 24% a year seems like it would lead to weird results. Like if a bank had survived fifty years and had a few hundred million in assets it would now be responsible for the entirety of US GDP. EDIT: I looked at BOA as a random test case - 2.1T in assets, 22B in income, seems to match the ~1% rule: https://ycharts.com/financials/BAC/income_statement/quarterly https://ycharts.com/financials/BAC/income_statement/quarterl...
- milesskorpen 7y ago
  Assets aren’t revenue though; I don’t think profit margin and ROA are comparable.
  - mcguire 7y ago
    The aren't, which is why you're advised to stay away from financial institutions as a beginning small investor. They require specialized evaluation techniques.
- pintxo 7y ago
  24% sounds very much like return on equity. While the 5% for the restaurant are somewhat likely return on revenue.
  - brownbat 7y ago
    Alright, yeah, I pulled up basic formulas on profitability ratios to check my math: https://thismatter.com/money/stocks/valuation/profitability-ratios.htm https://thismatter.com/money/stocks/valuation/profitability-... I've talked myself into: maybe 24% is technically "profit margin," but only because banks are weird and profit margin makes no sense for them. If you have a grocery store and you sell $100 of fruit, maybe $1 is profit. It makes sense to say you have a 1% return on investment. $1 Profit / $100 revenue. That makes sense. But a bank loans out $100 at 5% interest. It collects $5 next year while the loan is still outstanding, of which $4 go to operating expenses. That is $1 profit on $5 of revenue, so 20% profit margin, by the formula. But it took $100 to get you there, just like the grocer, so 20% feels inflated for basically the same result. (In other industries you don't sell a peach only for the buyer to later give you a new peach back, so that throws all of this off.) (You raised ROE, which I think typically ROE for banks is 5-8%, and it's really dependent on random factors like how they treat shareholders, so you might be right? But I think we can set that aside too.) So none of this makes sense and maybe I give up? I can see why the industry just decided ROA is the measure here. It's not completely crazy, and seems to generate reasonable results relative to other industries. And if we're really asking, "hey, I have $100, maybe was loaned it by a lender or depositors, and I can magically run a buffet or a bank next year, what do I expect to earn?" Then yeah, we really want to be comparing the profit margin of the buffet to the ROA of the bank, as incommensurable as those sound. Maybe this isn't completely crazy and the industry lit has this already figured out in the most reasonable way.
    - kgwgk 7y ago
      > If you have a grocery store and you sell $100 of fruit, maybe $1 is profit. It makes sense to say you have a 1% return on investment. Return on investment is something else. A grocery store will have sales well above the invested capital. The profit margin may be low-single-digit while ROI is double-digit.
superkuh 7y ago
There are less than 5000 commercial banks in the united states and it is very rare a new one is approved. They've been consolidating and the total number declining for decades. Banking isn't a monopoly but it is a very limited, exclusive, club for those with lots of assets. After all, if you're a bank you can create new money supply out of thin air by lending out money you don't have (fractional reserve). A money printing machine is a very valuable business. Every other service a bank provides is just icing on top of this.
- lonelappde 7y ago
  Fractional reserve is lending out money people give the bank. it's not free money for the bank; the credit is balanced by a debt. You can do the same thing if you convince people to leave stuff at your house and then you rent it out. Heck, every lessee on Airbnb is doing this. As is everyone who has a mortgage and an investment account.
  - chii 7y ago
    A bank can lend out more than the total deposits they have under fractional reserve banking. This is literally creating new money.
    - superkuh 7y ago
      Yep. The majority of the M0 money supply is created through fractional reserve banking as debt.

brownbat 7y ago

I can't figure out where that article gets its numbers from or which banks it's referring to. The industry standard measure for bank profitability is something called ROA, return on assets, and it's an extensively studied academic topic, with the general consensus that an ROA greater than 1% is pretty good. https://greyhouse.weissratings.com/ROA-ROE-and-What-These-Key-Measures-Mean-for-YOUR-Bank https://greyhouse.weissratings.com/ROA-ROE-and-What-These-Ke... https://www.fdic.gov/regulations/resources/cbi/report/cbi-roa.pdf https://www.fdic.gov/regulations/resources/cbi/report/cbi-ro... I'm sure there are some large institutional players that do consistently better than 1%, maybe up around 5 or 7. But a longstanding industry with a sustained 24% returns would... sustained compounding 24% a year seems like it would lead to weird results. Like if a bank had survived fifty years and had a few hundred million in assets it would now be responsible for the entirety of US GDP. EDIT: I looked at BOA as a random test case - 2.1T in assets, 22B in income, seems to match the ~1% rule: https://ycharts.com/financials/BAC/income_statement/quarterly https://ycharts.com/financials/BAC/income_statement/quarterl...

milesskorpen 7y ago
Assets aren’t revenue though; I don’t think profit margin and ROA are comparable.
- mcguire 7y ago
  The aren't, which is why you're advised to stay away from financial institutions as a beginning small investor. They require specialized evaluation techniques.
pintxo 7y ago
24% sounds very much like return on equity. While the 5% for the restaurant are somewhat likely return on revenue.
- brownbat 7y ago
  Alright, yeah, I pulled up basic formulas on profitability ratios to check my math: https://thismatter.com/money/stocks/valuation/profitability-ratios.htm https://thismatter.com/money/stocks/valuation/profitability-... I've talked myself into: maybe 24% is technically "profit margin," but only because banks are weird and profit margin makes no sense for them. If you have a grocery store and you sell $100 of fruit, maybe $1 is profit. It makes sense to say you have a 1% return on investment. $1 Profit / $100 revenue. That makes sense. But a bank loans out $100 at 5% interest. It collects $5 next year while the loan is still outstanding, of which $4 go to operating expenses. That is $1 profit on $5 of revenue, so 20% profit margin, by the formula. But it took $100 to get you there, just like the grocer, so 20% feels inflated for basically the same result. (In other industries you don't sell a peach only for the buyer to later give you a new peach back, so that throws all of this off.) (You raised ROE, which I think typically ROE for banks is 5-8%, and it's really dependent on random factors like how they treat shareholders, so you might be right? But I think we can set that aside too.) So none of this makes sense and maybe I give up? I can see why the industry just decided ROA is the measure here. It's not completely crazy, and seems to generate reasonable results relative to other industries. And if we're really asking, "hey, I have $100, maybe was loaned it by a lender or depositors, and I can magically run a buffet or a bank next year, what do I expect to earn?" Then yeah, we really want to be comparing the profit margin of the buffet to the ROA of the bank, as incommensurable as those sound. Maybe this isn't completely crazy and the industry lit has this already figured out in the most reasonable way.
  - kgwgk 7y ago
    > If you have a grocery store and you sell $100 of fruit, maybe $1 is profit. It makes sense to say you have a 1% return on investment. Return on investment is something else. A grocery store will have sales well above the invested capital. The profit margin may be low-single-digit while ROI is double-digit.

superkuh 7y ago

There are less than 5000 commercial banks in the united states and it is very rare a new one is approved. They've been consolidating and the total number declining for decades. Banking isn't a monopoly but it is a very limited, exclusive, club for those with lots of assets. After all, if you're a bank you can create new money supply out of thin air by lending out money you don't have (fractional reserve). A money printing machine is a very valuable business. Every other service a bank provides is just icing on top of this.

lonelappde 7y ago
Fractional reserve is lending out money people give the bank. it's not free money for the bank; the credit is balanced by a debt. You can do the same thing if you convince people to leave stuff at your house and then you rent it out. Heck, every lessee on Airbnb is doing this. As is everyone who has a mortgage and an investment account.
- chii 7y ago
  A bank can lend out more than the total deposits they have under fractional reserve banking. This is literally creating new money.
  - superkuh 7y ago
    Yep. The majority of the M0 money supply is created through fractional reserve banking as debt.