The Banking Industry

The banking industry has immensely benefited from the growing deregulation trend around the world. This has provided more business opportunities for banks which, combined with technological advancements in online banking, has thrown the field wide open for innovations which can lead to bigger profits.

Banks are vital to the world economy. These institutions provide liquidity, transfer risks, facilitate different financial transactions, and supply financial information to both businesses and individuals. The management of a bank analyses certain criteria before it makes a decision on the number of loans it would grant, as well as the interest rates and the recipients of these loans. Some of these criteria are profitability or the revenue growth and earnings, the adequacy of capital, asset quality, liability and asset management, liquidity, and interest rate risks.

The fluctuations in interest rates can affect a bank's profitability. In order to lessen its impact, banks strive to generate more revenues through their fee-based services. Most banking financial statements would then break up their revenue figures into their fee-based and non-fee-based earnings. Banks that have a high fee-based revenue often earn a higher amount of return compared to other firms.

One way to assess the effectiveness of a bank's management is by looking into its ROA or Return On Assets. Since banks are usually greatly leveraged, an ROA of 1% indicates large profits. Another key figure that investors generally consider when evaluating a bank is the its Net Interest Margin or NIM. A majority of banks would have a NIM figure in the 2% to 5% range. This may seem to be low, however, even a .01% difference can mean a big change in a bank's profits.

Capital adequacy determines a bank's financial condition. So if it has a difficult time meeting the requirements of its capital ratio, the bank can increase this ratio through a number of methods. If it is a publicly traded bank, then it can sell subordinated debt or issue more stocks. It can also reduce its assets so it can improve its capital ratio. Furthermore, it may seek a merger with another bank.

With all the many changes constantly occurring in the financial market, banks nowadays have become more adaptive so they can continue to be profitable which ultimately benefits the economy around the world.

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