Pro tip: For banks and NBFCs don’t check results via screener, refer quarterly presentations, result announcements and ARs. The P&L flow for a financing company is slightly different than any other company. The P&L flow goes something like this:
- Interest Income (A)
- Other income – fees, commissions, brokerages, off book AUM earnings etc. (B)
- Total income (C = A + B)
- Interest expenses (D)
- Net total income (E = C – D)
- Operating expenses (F)
- Pre provisioning operating profit (G = E – F)
- Net Provisions + Write off expenses (H)
- PBT (G – H)
Revenue for a bank is made up of both 1. Interest income (Lending income) and Other income (Fees + Off book AUM income). Other income for banks is not necessarily one-off income, it is usually quite stable as fees/commissions are dependent on usage of regular products by its clientele. While Interest income is the core income of a bank, fee based income is equally important because it gives a boost to the ROE of a bank (To earn fee income you don’t have to first raise capital and then lend it out).
A bank with sustainably high Other income as a % of net total income is golden.
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