How to Calculate

Profitability Ratios for

Banks
These three ratios can give you a good idea of how well a
bank uses its resources to generate profits.
To determine the profitability of banks, simply looking at the earnings per share isn't
quite enough. It's also important to know how efficiently a bank is using its assets and
equity to generate profits. For this reason, three key profitability ratios to look at when
evaluating a bank stock are:

Return on assets (ROA)

Return on equity (ROE)
Net interest margin (NIM)

Here's how to calculate each one, as well as an example of each using 2015 data
from Wells Fargo.
Return on assets
To calculate a bank's return on assets, you need to know two pieces of information.
First, you need to find the net income, which can be found on the bank's income
statement. Next, you need to find the bank's assets (loans, securities, cash, etc.), which
can be found on the bank's balance sheet. To calculate return on assets, simply divide
the net income by the total assets, then multiply by 100 to express it as a percentage.

As an example, Wells Fargo produced net income of just over $23 billion in 2015, and
had total assets of $1.787 trillion at the end of the year. Dividing these two numbers and
multiplying by 100 shows a ROA of 1.29%.
Now, we're going to complicate things just a little. If you want the most accurate
calculation possible for ROA (or ROE), you need to take an average of the assets or
equity over the time period you're considering. In the case of a bank's annual ROE, the
best practice is to take the average of the assets at the end of the last five quarters. For
Wells Fargo, the five-quarter average assets were $1.737 trillion, which produces a
slightly higher ROA of 1.32%.
 Powered By

Return on equity
For return on equity, you'll need the net income as well as the total shareholders' equity,
which can be found on the balance sheet. The formula for ROE is similar to the ROA
formula, except that you divide by equity instead.

Continuing our Wells Fargo example, we can determine that the bank's five-quarter
average equity is $189.8 billion. Using this, along with the bank's $23 billion in net
income shows a ROE of 12.1%.
Net interest margin
Finally, to calculate the net interest margin, you need to determine the bank's net
interest income. You can find this on the income statement, or you can subtract the
bank's interest expense from its interest income. Then, divide this by the bank's assets.
Similarly to the other two metrics, use a five-quarter average of assets in order to
produce an accurate NIM.

For Wells Fargo, its income statement shows 2015 interest income of $49.28 billion,
and interest expense of $3.98 billion. Therefore, we can calculate its net interest income
as $45.3 billion, and its net interest margin as 2.6%.
So, what is "good" profitability?
In terms of ROA and ROE, 1% and 10%, respectively are generally considered to be
good performance numbers. And, for the fourth quarter of 2015, the industry averages
were 1.03% (ROA) and 9.21% (ROE). Net interest margin tends to fluctuate over time
depending on the prevailing interest rates -- that is, interest margins tend to be higher
when market interest rates are up. In the fourth quarter of 2015, the industrywide
average NIM was 3.02%, but was as high as 4.91% in the mid-1990s.
 Tax calculation

TAX ON INTEREST INCOME

SAVINGS ACCOUNT: Interest on savings account is taxable as per Income tax slab
rates applicable to the investor. However, deduction under section 80TTA is allowed on
interest from savings account with a maximum of Rs.10,000/- per year. This deduction
is available only to individual and HUF. In 80TTA of the Income tax act, interest upto
`10000 earned from all savings bank account is exempt from tax. This is applicable for
savings bank account, post office or co-operative banks. If the interest earned from these
sources exceeds Rs.10000, the extra amount will be taxable. For example: Raahul earns
Rs.8000 from his saving accounts, so he does not have to pay any tax for it. But Gaurav
earns Rs.15000 from his savings accounts, so he needs to pay income tax on Rs.5000
according to his tax slab. "TDS on saving interest is not deducted like fixed deposit and
term deposit. But the account holder should calculate and declare the interest from all
saving bank accounts during the financial year under the head 'Income from other
sources' claim deduction u/s 80TTA and pay the tax accordingly", says, Sudhir Kaushik,
Co-Founder & CFO, TaxSpanner.com. Keeping minimum balance in savings accounts is
suggested because the rate of interest is very low and it is also reduced by income tax
payable: 2.8% per annum for person in 30% tax slab with 4% interest on saving account.
FIXED DEPOSIT: Interest earned from fixed deposits is liable to be taxed on accrual
basis at the slab rate applicable. Interest on Fixed is fully taxable at Income tax slab
rates applicable to the person. There is no separate deduction of Rs. 10,000/- as
available in the Savings account interest. "As per Income Tax Act, 1961 u/s 194A (1) (3)
(i) where the amount or aggregate of the amounts of interest credited or likely to be
credited or paid during the financial year exceeds Rs.10,000/-, TDS is applicable from
the first interest flow" adds Kaushik. Minors who hold deposits are also subject to TDS;
the person in whose hands the minor's income is included can claim the credit for the
TDS.
TDS RATES ON FIXED DEPOSITS:
@ 10% on interest to residents,
@ 20% is applicable in absence of PAN / valid PAN.
@ 30.90% to non resident Indians
RECURRING DEPOSITS: Recurring Deposits attract tax deduction @10% of the
Interest earned. Earlier, TDS was not charged on Recurring Deposits but from 1st June
2015 - TDS on Recurring Deposits @ 10% U/S 194A was added. One has the option to
either reinvest the Interest earned on Recurring Deposits or to withdraw the Interest
earned on Recurring Deposits. The TDS on Interest earned on Recurring Deposits is
now the same as the TDS on Interest earned on Fixed Deposits. The current income tax
slab rates can be divided into: Nil category; 10%; 20% & 30% category. One receiving
the Interest on Recurring Deposit cannot claim any deduction on the same and tax
would be charged on the full interest amount as compared to Interest on Savings
Account on which a deduction of Rs. 10,000 is allowed.
BONDS: Corporate bonds are debt securities issued by private or public corporations.
Interest on corporate bonds is taxable on accrual basis at slab rates. Interest will be
charged according to method of accounting followed. "Generally, bonds are in demat
form and listed, hence there is no TDS deduction. Thus no hassles of filing form 15G/H"
adds Kaushik. "The difference between the purchase and sale price of the bond is treated
as capital gains. The capital gains will be long term if these bonds are held for more than
12 months otherwise the gains will be short term. These are tax efficient if held for more
than 1 year," says, Vaibhav Sankla, Director, H&R Block India. Capital gains are taxed
on redemption of bonds; Short term capital gains - as per slab rates; long term capital
gains - 10%, without indexation interest - As per slab rates. Bonds held for a period up
to 12 months can result in short term capital gain that is taxed as ordinary income.
Divya Baweja, Partner, Deloitte Haskins & Sells LLP says, "Investing in tax free bonds is
considered as advantageous option as the interest received from tax free bonds is
exempt under Section 10 (15) (iv) (h) of the Income tax Act, 1961 (the Act). Further
investment in tax free bonds is also deliberated as risk free as the investment is made in
government securities. Also if these bonds are redeemed upon maturity then the capital
gain is taxable at a concessional rate of 10% (without indexation)."
EXEMPTION ON TDS CAN BE CLAIMED: By submitting 15G (below 60 Years)
and 15H (60 years and above) exemption on TDS can be claimed. Your total taxable
income can be claimed if interest during the financial year is not likely to exceed the
maximum amount which is not chargeable to income tax presently Rs.250000 for
person below 60 years, then you can submit self declaration in Form 15G. "In case the
interest payable by the Bank during the financial year on time deposits is likely to
exceed the maximum amount which is not chargeable to income tax, then the Form 15G
submitted will be treated as invalid" says Kaushik. Senior Citizen can also claim
exemption by submitting Form 15H. There is also penalty for declaration of false form
15G/H. For false or wrong form 15G penalty u/s 277 of the Income Tax Act is charged.
Moreover, non-resident Indians cannot claim exemption of Form 15G for tax deduction.
Non-resident Indians are also subjected to higher rate of interest @30.90%.
PPF/ EPF: Interest earned from Public Provident Fund remains fully exempted from
tax without any limits, confirmed in the budget 2016. The interest on is compounded
annually, with the calculation done every month. Both the interest earned and
withdrawals from PPF are tax-free. Though PPF remains tax free, interest on EPF
attracts charges from 1st April 2016. The main principal amount and withdrawals made
is exempted from tax but 60% of the interest is taxable and the rest 40% stays
exempted. Savings Account gives in the lowest interest as compared to Fixed or
Recurring Deposits and hence it is advisable for an individual to not prefer to keep much
amount in savings account as it earns very low interest.