Definition (1):
Bank profitability is an important indicator of bank performance, it represents the rate of return a bank has been able to generate from using the resources at its command in order to produce and sell services.
Definition (2):
Bank profitability is the measure of a bank’s performance. Banks make a profit by earning or generating more money than what they are paying in expenses. The main part of the profit of a bank comes from the service fees, charged for its services and the earned interests from its assets. Its main expense is the paid interest on its liabilities.
A bank’s main assets are its loans to people, businesses, and other companies and its holding securities, while its main liabilities are the deposits and the borrowed money, either from other banks or by means of selling commercial paper in the money market.
To determine bank profitability, it is not enough to just look at the earnings per share of the banks. It is also crucial to know how effectively and efficiently a bank is utilizing its assets and equity for generating profits. Three major profitability ratios to consider while evaluating the performance of a bank are:
- Return on assets (ROA): (Net Income /Total Assets)*100
- Return on equity (ROE)
- Net interest margin (NIM): (Net Interest Income/ Total Assets)*100