Question

What do you think are the reasons for the bank’s net profit?

Answer 1

1. Bank's net profit depends on its expense and revenue. Higher the difference between expense and revenue, higher will be the bank's net profit. Following are the reasons for the bank's net profit:

a) Interest Revenue: Bank performs two task basically that is accepting deposits from customers and granting them loans. In this way, bank earns profit if the interest rate of lending is higher than interest rate on deposits. It is the major source of revenue for bank and converting it into net profit. Loans are like bread and butter for most banks in earning revenue.

b) Granting Services: Banks provide various services to its customers like wealth managment advice, ATM services, account checking, credit card facilities, overdraft facilities etc. Bank charges fees for providing such service which proves as revenue for bank and leads to net profit generation.

c) Investment In Securities: Investing a handsome amount in profit generating short term securities can be proved as a good source of revenue and it can increase its net profit provided that bank should take this decision wisely. Interest earned on securities will be reported as income for banks.

d) Advisory Fees: Investment banks charges fees for advising clients wanting to bid for the other companies in case of mergers and acquistions or managment buyt-out. It can be proved as good opportunity for banks to make profit as these decisions are complex and helps banks in  underwriting shares related to these deals.

e) Currency Dealing: Banks make money by buying and selling currencies of different nations of world as difference in the buying and selling price generates profit. Bank also charge fees for such dealing and earn profit.