As of June 2020, the trailing twelve months' net profit margin for retail or commercial banks was approximately 13.9%. This is a sharp decrease from June 2019, when the net profit margin for commercial banks was 27.6%. For comparison, the net profit margin for commercial banks in June 2018 and June 2017 came in at 23.8% and 24.3%, respectively.
The average profit margin for companies in the banking sector can fluctuate greatly depending on financial market conditions. The International Monetary Fund (IMF) attributed the decline in 2020 to the challenges posed by the COVID-19 pandemic. The IMF predicts that globally the banking sector will continue to post declining profits through 2025 due to the ongoing tightening of financial conditions. This could also be attributed to, in part, the rising service and price competition in this sector from the fintech startups taking market share in many segments of banking, namely, lending, payments, insurance, mortgage, and so on.
In this article, we'll compare the profit margins for different types of institutions within the banking sector. Plus, we'll highlight some of the metrics investors and analysts use to evaluate banks as potential investment opportunities.
Key Takeaways
- As of June 2020, the average net profit margin for retail or commercial banks was 13.9%, a sharp decline over previous years attributed to tightening financial market conditions and the COVID-19 pandemic.
- In the United States, profit margins for regional banks tend to be higher than the profit margins for money center banks.
- To correctly analyze banks, it's important to compare companies that operate similarly, serve the same marketplace, and are similar in size.
- Three key metrics for investors to use when evaluating companies in the banking sector as potential investments are net interest margin, efficiency ratios, and the return on assets (ROA) ratio.
Comparisons of Bank Profit Margins
It is somewhat difficult to even talk about an average profit margin for the banking industry. Profit margins between different banks can vary from as low as 5% up to as high as nearly 45%. The profit margin for regional banks tends to be higher than that of money center banks, 25.7% on average as of June 2020. Money center banks operate with lower profit margins, averaging a trailing twelve months' net margin of around 20%.
But since money center banks deal in very large capital amounts, a 20% net profit for a given money center bank may represent an absolute dollar amount substantially higher than the amount represented by a25.7% profit margin realized by aregional bank.
A proper analysis would only compare banks similar in the major business they conduct, their sizes, and the specific marketplaces they serve. It isn't valid to compare a regional retail bank to a large investment bank, nor is it valid to compare an investment bank in India to an investment bank in the United States.
Metrics for Assessing Banks
Investors and analysts can use equity valuation metrics to assess banks. Three commonly used metrics are net interest margin, efficiency ratios, and return on assets.
Net Interest Margin
The net interest margin is, for banks, a similar measure to gross profit margin for most companies, calculated by subtracting total interest expense from the bank's total interest income. Interest income for banks comes primarily from issuing loans. Interest expenses represent the interest that banks must pay on the variety of deposit accounts held by the bank's customers.
As of the first quarter of 2022, the average net interest margin for U.S. commercial banks was 2.10%. The net interest margin can vary depending on the type and size of the bank. For example, between 2011 and 2021, the net interest margin for bank holding companies with assets greater than $750 billion consistently trended lower than the net interest margin for bank holding companies with assets between $50 billion and $750 billion.
Efficiency Ratios
Efficiency ratios are another commonly usedmetric for evaluating banking firms. Efficiency ratios measure how well a company utilizes its resources to make a profit. These ratios also help companies measure their performance against pre-determined goals and against their competitors in the same industry.
The goal for banks is to keep efficiency ratios low because they represent non-interest operating expenses as a percentage of the bank's total income. Efficiency ratios for the banking industry typically fall between 60% and 70%.
Return on Assets Ratio
The return on assets (ROA) ratio is important to companies in the banking sector because it determines how profitable the company is relative to its total assets. A bank's ROA ratio is calculated by dividing the net, after-tax income by its total assets. Because banks are highly leveraged, even a seemingly low 1% or 2% ROA can still represent large revenues and profits. For the first quarter of 2022, U.S. commercial banks had a ROA of 0.93%.
FAQs
Key Takeaways. As of June 2020, the average net profit margin for retail or commercial banks was 13.9%, a sharp decline over previous years attributed to tightening financial market conditions and the COVID-19 pandemic.
What is the average profit margin in banking? ›
Financial Services Industry Profit Margin
For example, although the average profit margin for the financial services industry may be 14.71%, the profit margin for the industry's more concentrated subsectors ranges from 5.1% to 40.5%.
What is the average bank margin? ›
Net interest margin (NIM) reveals the amount of money that a bank is earning in interest on loans compared to the amount it is paying in interest on deposits. NIM is one indicator of a bank's profitability and growth. The average NIM for U.S. banks was 3% as of Q1 2023.
What is the average profit margin industry? ›
Industry Averages Profit Margins
| Industry | Average Gross Profit Margin | Average Net Profit Margin |
|---|
| Conglomerates | 28.6% | 1.5% |
| Consulting Services | 41.4% | 3.2% |
| Consumer Electronics | 27.6% | -15.1% |
| Credit Services | 84.1% | 20.1% |
118 more rowsAverage Annual Profit = Total profit over Investment Period / Number of Years.
What is the profit of banking industry? ›
Full-Year Net Income Declined in 2023 but Remained Well Above Pre-Pandemic Levels: The banking industry reported full-year 2023 net income of $256.9 billion, down $6 billion (2.3 percent) from the prior year, but still well above the pre-pandemic average.
What is a good gross profit margin for a bank? ›
But for other businesses, like financial institutions, legal firms or other service industry companies, a gross profit margin of 50% might be considered low. Law firms, banks, technology businesses and other service industry companies typically report gross profit margins in the high-90% range.
What is a margin in banking? ›
Margin is the money borrowed from a broker to purchase an investment and is the difference between the total value of an investment and the loan amount. Margin trading refers to the practice of using borrowed funds from a broker to trade a financial asset, which forms the collateral for the loan from the broker.
What is margin requirement in banking? ›
Margin requirement refers to the difference between the current value of the security offered for loan (called collateral) and the value of loan granted. It is a qualitative method of credit control adopted by the central bank in order to stabilize the economy from inflation or deflation.
What is a bank margin rate? ›
Margin rates represent the cost of borrowing for an investor for an outstanding margin loan. Each brokerage can set the margin rate differently, it typically reflects the current broker call rate or call money rate. This is the rate that the bank charges the broker for the money used to fund investors' margin loans.
For banks, the operating profit margin is obtained by dividing the operating profit by the Gross Operating Earnings of the bank. This matches like terms to like terms. The income being referred to here is the gross operating earnings of the bank that gives rise to operating profit.
What is a normal profit margin? ›
An NYU report on U.S. margins revealed the average net profit margin is 7.71% across different industries. But that doesn't mean your ideal profit margin will align with this number. As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin.
How do you calculate the average profit margin? ›
Generally speaking, a good profit margin is 10 percent but can vary across industries. To determine gross profit margin, divide the gross profit by the total revenue for the year and then multiply by 100. To determine net profit margin, divide the net income by the total revenue for the year and then multiply by 100.
What is the average net profit margin for the banking industry? ›
As of June 2020, the average net profit margin for retail or commercial banks was 13.9%, a sharp decline over previous years attributed to tightening financial market conditions and the COVID-19 pandemic.
How to calculate profit margin for banks? ›
To determine the net profit margin, we need to divide the net income (or net profit) by the total revenue for the year and then multiply by 100. To determine the operating profit margin, we need to divide the operating income or operating profit by the company's total revenue and then multiply by 100.
What are profit ratios for banks? ›
Common ratios used are the net interest margin, the loan-to-assets ratio, and the return-on-assets (ROA) ratio. Net interest margin is used to analyze a bank's net profit on interest-earning assets like loans, while the return-on-assets ratio shows the per-dollar profit a bank earns on its assets.
Is 50% profit margin too high? ›
Generally, a gross profit margin of between 50–70% is good and anything above that is very good. A gross profit margin below 50% is usually not desirable – though lower margins can still be sustainable for businesses with lower operating costs.
Is 30% a high profit margin? ›
In most industries, 30% is a very high net profit margin. Companies with a profit margin of 20% generally show strong financial health. If this metric drops to around 5% or lower, most businesses will need to make changes to remain sustainable.
Is 75% a good profit margin? ›
Benchmark your profit margin based on industry averages
For example, the gross profit margin for most retail businesses is approximately 20%, while for software, it's nearly 75% (see the table below).
Is 25% a high profit margin? ›
As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin. But a one-size-fits-all approach isn't the best way to set goals for your business profitability.
