Good question. I don’t think there is anything specific for banking. Just like any other business, as per Indian income tax regulations, losses from a specific business can be set off against future profits generated by that specific business (only!). So a bank can carry forward losses like any other business.
Now because a bank has past losses to carry forward, that means, tax wise, they will be able to generate profits but their final taxable profit would be after the previous year’s carry forward losses have been set off. This gain in bottom adds to the final Return on Assets number that a bank generates, and because Return on Equity is essentially Return on Assets * Gearing, it also has exponential gain on return on equity, specially for a leveraged business. Exemplifying how leverage boosts your profits:
Quote from Devil take the hindmost, A history of Financial Speculation by Edward Chancellor, pg: 207
Corporate leverage operates in a similar manner to the speculator’s margin loan. For exam-ple, if a company has earnings before interest of $100 million and interest payments of $90 million, then its net profits before tax are $10 million. A 10 percent increase in earnings to $110 million will produce a 100 percent rise in pre-tax profits to $20 million. Insull and other holding company operators in the 1920s enhanced the effects of corporate leverage by creating a pyramid of cross-shareholdings between heavily indebted companies
Here’s a snapshot of Consolidated P&L of IDFC First Bank for FY2021 (source: AR for FY2021 pg: 269)
Notice Balance in P&L carried forward from FY2020 to FY2021.
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