Banking and Insurance · Ch 1 — Commercial Banking
Income Statement of a Commercial Bank
Income Statement of a Commercial Bank
The income statement — usually presented as the profit and loss account — of a commercial bank shows how it earned its income during a period and what it spent to earn that income, so that the net profit for the period can be arrived at. A bank's income and expenditure differ from those of a trading firm because the bank deals in money rather than goods.
A simplified income statement of a commercial bank may be set out as follows.
| Income (earnings) | Expenditure (outgoings) |
|---|---|
| Interest earned on loans, advances and cash credit | Interest paid on deposits |
| Interest and dividends earned on investments | Interest paid on borrowings |
| Discount earned on bills | Salaries, wages and staff benefits |
| Commission, exchange and brokerage | Rent, rates, lighting and other establishment costs |
| Other operating income (locker rent, fees) | Depreciation on assets; printing and stationery |
| Provision for bad and doubtful debts and taxes |
How a bank earns and spends:
- The largest source of income is normally the interest earned on loans, advances and bills, followed by the return on investments. To this is added non-interest income — commission, exchange, brokerage and various service fees — which has grown in importance as banks offer more services.
- The largest expense is the interest paid to depositors. Because the bank earns a higher rate on its loans and investments than it pays on its deposits, the gap between the two — often called the interest spread — is the mainstay of banking profit.
- To this are added the ordinary running costs of any organisation — staff salaries, rent, depreciation, stationery — and, crucially, a provision for bad and doubtful debts, since some loans will inevitably not be repaid.
The net profit is what remains after every item of expenditure, including provisions and tax, has been deducted from total income. In brief: …
A statement showing a commercial bank's income (mainly interest earned, plus commission and fees) and its expenditure (mainly interest paid, operating costs and provisions) for a pe …
The difference between the interest a bank earns on its loans and investments and the interest it pays on its deposits and borrowings — the principa …