Answer – Matching Earnings Ratios of Banks

This is the answer for Quiz – Matching Earnings Ratios of Banks.

Cost/IncomeNet Interest MarginNet Interest Income / Total RevenueBank (1, 2, 3, 4)
A69%2.1%47%Bank of America
B53%7.3%102%Banco Santander (Brazil)
D69%0.9%39%Societe Generate

A Global financial services company

  • High cost/income ratios – Blend of high cost investment banking and low profits
  • Strong margins due to dominance in high margin retail credit card and emerging market business
  • Relatively low NII/TR due to diversity of other businesses and commission income

B Emerging market retail bank

  • Low cost/income ratio – reflecting more the high margins than true cost efficiency
  • High margins reflect higher risk environment
  • High NII/TR is due to dominance of retail activities

C UK building society

  • Average cost/income ratio due to large branch network and fine margins but simple model
  • Low margins in competitive retail and low risk mortgage business
  • High NII/TR as almost exclusively retail secured lender

D Global investment bank with substantial commercial banking activities

  • Relatively high cost/income ratio due to structural rigidities and high-cost investment banking
  • Low margins due to tough economic conditions and focus on wholesale banking
  • Low NII/TR still reflects relatively low level of retail activity.

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