Bank Income Structure

Question 1

Sources of Income for Banks?

Answer 1

(1) Net Interest income (interest earned on assets - interest expense); (2) Noninterest income

Question 2

(1) How does Net Interest Income change?

Answer 2

• Growth (amount of earning assets and liability; mix – proportion of earning assets and liabilities).
• Rates (change in underlying interest rates earned on assets—i.e., “asset yield”—or paid on liabilities, i.e., “cost of funds”).
  o Relationship between interest income and interest rate risk
   As interest rates change, the rate earned or paid on financial assets and liabilities may change at different times and by different amounts.
• Depends on type & proportion of financial assets and liabilities on an institutions balance sheet.
• Interest paid and interest earned may not change by the same amounts.
• Could cause fluctuations in interest income.

Question 3

Relationship between interest rates and net interest income?

Answer 3

Movement of interest rates affects net interest income, which the primary source of bank industry earnings.

Movement of market internes rate is a potential risk to bankers and something they monitor closely.

Question 4

(2) Types of Noninterest income
[favored by bank investors because it diversifies sources of earnings away from the traditional loan and deposit business]

Answer 4

Fee income
o Deposit service charges
o Investment management revenues
o Gains on loan sales
o Loan servicing
o Credit card processing
o Investment banking revenues
o Other

Question 5

What is Net interest Margin and what does it tell us?

Answer 5

NIM = net interest income - average earning assets. It tells us how efficient a bank is at generating net interest income. (But it cannot tell us how much income is generated – we need to know how big the bank is.