Bank Profitability

By William C. Spaulding · thisMatter.com · 2025 · CFE201-103-25

A tutorial from thisMatter.com on how a bank makes a profit. It explains that a bank earns money from the fees it charges for its services and the interest it earns on its assets, that its major expense is interest paid on its liabilities, and that banks increase profits by using leverage. Profit is measured as a return on assets (ROA) and a return on equity (ROE), which with leverage is much larger than ROA.

On the syllabus

Exam CFE-201 — outcomes 2a.

Profit Measures: Return on Assets and Return on Owners' Equity

Assets = Liabilities + Bank Capital (Owners' Equity)
Vault cash and loan loss reserves are assets that do not earn income
Net interest income is interest received on assets minus interest paid on liabilities; the interest rate spread is the average rate earned on assets minus the average rate paid on liabilities
Net interest margin is net interest income divided by average total assets
ROA is net income divided by average total assets
The leverage ratio is bank assets divided by bank capital, and ROE = ROA × leverage ratio = net income divided by bank capital

Sources

Bank Profitability (thisMatter.com) — the document: title, author (William C. Spaulding, as the site credits all its articles), the opening paragraphs, its one section heading and the definitions listed under it; the page carries a site-wide copyright of 1982-2026 and no date of its own
CFE 201 Syllabus, Mar 2027/Jul 2027 (SOA) — the reading (CFE201-103-25: Bank Profitability), its learning outcomes, and the year 2025 taken from its study-note code
CFE 201 Fall 2025 exam solutions (SOA) — refers to the reading as "ThisMatter: Bank Profitability", which identifies the document