Choosing Consistent Profitability Ratios for Bank Analysis

Summary

The document addresses why bank profitability ratios can differ across references, focusing on net profit margin and return on assets. Net profit margin may use net interest income or broader total income as its denominator, while return on assets may use ending assets or average assets. Its practical guidance is to consult a recognized accounting or finance reference, such as CFA materials, and to apply definitions consistently when comparing firms.

The choice of denominator depends on the analytical context rather than a single universally correct formula. Average assets can smooth sensitivity to the reporting date, while current assets may be more suitable after a major merger or acquisition, when the balance sheet has changed substantially. The discussion is conceptual and provides no detailed bank-specific calculation framework or evidence comparing competing definitions. It also notes that suspected accounting irregularities can make the choice of averaging period relevant to interpretation.

Key ideas

• Bank net profit margin may be measured against net interest income or total income.
• Return on assets may use either ending total assets or average total assets.
• Ratio definitions should be selected consistently and with the analysis context in mind.
• Average assets can reduce sensitivity to a single reporting date.
• Recent mergers or acquisitions may make current assets more representative than an average.

Tags

# Dupont analysis of banks


# Dupont analysis of banks












I've been analyzing banks balance sheet. However, I am getting confused regarding definition of ratios. For instance, some authors state

Net Profit Margin = (Net profit)/Net interest income others as Net Profit Margin = (Net profit)/total income i.e. some of interest income and other income.

Similarly, some authors define ROA= Net profit/Total assets while others define it as ROA= Net profit/Average Total assets

Is there any comprehensive source/reference for ratio analysis of banks?

## Answer by JeanGuillaume (score 3)

https://quant.stackexchange.com/a/47529

You can look at the contents of the CFA institute : https://blogs.cfainstitute.org/insideinvesting/2013/01/23/how-much-does-apple-make-a-dupont-analysis/ . As there are more and more candidates and CFA charteholders, we could say that their views are becoming or are already the mainstream views.

I would add that accounting and corporate finance is not a "pure science". Sometimes, you will use a formula with the average assets and in others case the current assets. For instance, just after a merger or an acquisition, it does not make sense to take the average assets as the company you study has dramaticaly changed recently. Conversely, if you suspect dubious accounting, taking the average is a way to eliminate some sensibilities of the last report.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.