In the intricate world of finance, banks stand as formidable institutions that drive economic growth, facilitate transactions, and play an indispensable role in the global financial ecosystem. But have you ever wondered how banks, both historically and in modern times, manage to generate profits from the services they offer? In this article, we'll delve into the mechanisms that underlie banking profitability, using real numbers and examples to provide a clearer understanding.
A Glimpse into History: Italy's Banking Legacy
Centuries ago, Italy emerged as the trading center of Europe, with its bustling markets giving birth to the concept of banking. The term "Banco," which translates to "Bench," marked the inception of financial institutions. Fast forward to today, and the banking sector has evolved into a sprawling network of over 30,000 banks worldwide. At the forefront of this financial landscape are the top 10 global banks, wielding a staggering collective asset value of approximately $25 trillion. Among these giants are industry powerhouses like Industrial and Commercial Bank of China Ltd., China Construction Bank Corp., JPMorgan Chase & Co., Bank of America Corp., and Wells Fargo & Co., each playing a pivotal role in shaping the global economy.
Unveiling Banking Profitability in the Modern Era
The 2008 U.S. financial crisis sparked debates on the culpability of banks in times of economic turmoil. An exploration of the SVB Financial Group's 10K report and insightful YouTube videos offers a deeper understanding of the nuances that contributed to the crisis. Examining the intricate web of events and decisions sheds light on the complexities that characterize the modern banking landscape.
The Engine of Profit: How Banks Generate Revenue
Banks thrive on a fundamental principle: the spread. This principle revolves around the difference between the interest rates banks pay on deposits and the rates they charge on loans. This differential, known as the spread, forms the cornerstone of a bank's income stream. For instance, consider SVB's non-interest income of $1,778 and interest income of $5,673. These sources of revenue, coupled with various fees for services like account maintenance, ATM usage, wire transfers, and credit card transactions, create a diverse and robust revenue stream. The cumulative effect of these revenue sources shapes the financial performance of banks.
Beyond the Obvious: Banking Business Models and Strategies
Digging deeper into banking operations reveals a multifaceted approach to revenue generation. Banks, in addition to their primary lending and borrowing functions, engage in trading activities involving stocks, bonds, currencies, and other financial assets. This avenue contributes to additional income, albeit with an associated level of risk. Risk management forms a critical component of banking operations, encompassing factors such as credit risk, market risk, and operational risk.
2. QUICKHISTORY
OFBANKING
ITALY
Italy was the trading center of Europe in the
11th century (Banco means Bench = Bank).
TODAY
Over 30,000 banks in the world.
TOP BANKS
The top 10 banks account for roughly $25 trillion.
The top 5 ones are:
• Industrial and Commercial Bank Of China Ltd. (IDCBY)
• China Construction Bank Corp. (CICHY)
• JPMorgan Chase & Co. ( JPM)
• Bank of America Corp. (BAC)
• Wells Fargo & Co. ( WFC)
• Citigroup Inc. (C)
By Franz Dolegeal
4. SVB lends money to individuals and
businesses. Interests charged in loans are
higher than the paid deposit. Banks earn
a profit on the spread.
Interest Income
SVB generates revenue from fees
charged for various services, such as
account maintenance, ATM usage, wire
transfers, and credit card transactions.
Fee Income
SVB invest their own capital in various
financial instruments to generate
additional income.
Investment income
SVB’sBUSINESSMODEL
SVB engages in trading activities, such as
buying and selling stocks, bonds,
currencies, and other financial assets, in
order to profits
Trading Income
SVB manages the risks associated with its
lending and investment activities, such as
credit risk, market risk, and operational
risk
Risk Management
Make a big impact with our professional slides and charts
By Franz Dolegeal
5. These are the fees:
• Commission fees
• Lending related fees
• Foreign exchange fees
• Credit card fees
• Deposit service charges
• Credit fees
NON-INTEREST
INCOME
$1778
INTEREST
INCOME
$5673
NON-INTEREST
EXPENSE
INTEREST
EXPENSE
$1188
$3621
SVB’sINTERESTSINCOME ANDEXPENSE
• Loans
Lending related fees:
• Taxable
• Non-Taxable
• Short term investment
securities
• Federal funds sold
• Credit fees
• Compensation and
Benefit
• Professional services
• Premises & equipment
• Net occupancy
• Business dev. & Travel
• FDIC
• Merger related charges
• Deposits
• Borrowings
Visible in the Consolidated Income Statement (page 96 of SVB’s 10K))
By Franz Dolegeal
6. SVB’s%INTERESTSINCOME ANDEXPENSE
FROM THE INCOME STATEMENT ON PAGE 96
NON-INTEREST
INCOME
INTEREST
INCOME
75%
NON-INTEREST
EXPENSE
INTEREST
EXPENSE
By Franz Dolegeal
7. NET INTEREST INCOME
$5,673 billion
TOTAL INTEREST
$1,188 billion
SVB’sSPREAD
Refers to the difference between the interest rate a bank pays on deposits and the interest rate it charges on loans.
SPREAD 21%
SPREAD = Total Interest Income $5,673 Billion – Total Interest Expense $1,188 Billion
By Franz Dolegeal
8. LOANS
$74,250
INVESTMENTS
SECURITIES
OTHER
ALOWANCE
$(636)
$3,082
• Available for sale securities
• Taxable
• Held to Maturity Security
• Intangible
• Goodwill
• Accrued interest
receivable
• Premises and Equipment
• Depreciation and
amortization
• Credit loss on loans
$120,054
SVB’sASSETS
FROM THE BALANCE SHEET PAGE 95
By Franz Dolegeal
INVESTMENT
INCOME
(Hedging)
9. LOANS (2022): $3,208 M - 63%
$1,966 M (2021) – 29%
$1,520 M (2020)
SECURITIES (2022): $2,465 M – 86%
$1,323 M (2021) – 83%
$722 M (2020)
SVB’sHEDGING:SECURITIES
FROM THE INCOME STATEMENT ON PAGE 96
By Franz Dolegeal
10. $150 Million
CREDIT CARD FEES 2022
$131 Million
CREDIT CARD FEES 2021
$98 Million
CREDIT CARD FEES 2021
FROM THE INCOME STATEMENT ON PAGE 96
CREDITCARDFEES
14.5%
33.7%
By Franz Dolegeal
11. REVENUES
1. Interest Income
2. Non-Interest income
3. Trading Income
4. Foreign Exchange Income
EXPENSES
1. Salaries and benefits
2. Occupancy Expenses
3. Technology Expenses
4. Marketing and advertising
5. Loan Loss Provision
6. Legal and Reg. Expenses
7. Other Expenses
SVB’sNETINCOME
Refers to the difference between the interest rate a bank pays on deposits and the interest rate it charges on loans.
Net Income
(Revenue – Expense)
By Franz Dolegeal
12. NET INTEREST INCOME
$4,485 M
AVERAGE EARNING
ASSETS
$194,405 M
SVB’sNETINTERESTMARGIN
Refers to the difference between the interest rate a bank pays on deposits and the interest rate it charges on loans.
NET INTEREST
MARGIN (NIM) 2.31%
Nim = (Investment Income – Interest Expenses) / Average Earning Assets
