Banking Revenue to Assets

Revenue, measured as the combination of income from interest based and non-interest based sources, is one of the four main components of net income. Because of the importance of bottom-line metrics like return on equity, it is critical to better understand the underlying trends of its components.

Revenue Over Assets Ratio

The chart above shows the historical time series for revenue adjusted by dividing total banking assets. As income is primarily driven by the asset-size of a bank (e.g. loans and leases), it makes sense as a divisor to adjust the ratio for comparability through time.

Since the 1990 to Present period contains three business cycles, there are also three distinct phases of the ratio:

  1. After the Savings and Loan crisis, the revenue/assets ratio dropped. This coincided with significant deleveraging as measured by the equity multiplier.

  2. During the 2001 recession, the ratio again dropped, this time more severely than in the early 1990s. However, this decrease was not because of deleveraging. Banks were simply making less money on their asset base.

  3. As one would expect, the ratio dropped through the financial crisis. This time however, the ratio continued to drop until 2017, which was significantly longer than previous cycles.

While each of these cycles saw the revenue to asset ratio increase prior to the next recession, the overall trend has been downward, in line with overall deleveraging over the same time period.

Bank profit margins remain significantly lower than seen prior to the 2008 financial crisis. To return to former levels, if even possible, the revenue to assets ratio will also need to improve. In the past year, it has finally begun to do just that.

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