DEFINITION of 'Pre-Provision Operating Profit - PPOP'
The amount of income a bank or similar type of financial institution earns in a given time period, before taking into account funds set aside to provide for future bad debts. The PPOP will be reduced once the bank deducts the dollar amount of bad debt provisions it determines need to be set aside to cover expected loan defaults, but this is not a cash outflow for the bank. The PPOP simply provides a reasonable estimate as to what the bank expects to have left for operating profit once it eventually incurs cash outflows due to defaulted loans.
BREAKING DOWN 'Pre-Provision Operating Profit - PPOP'
Since most banks typically have a large portfolio of loans outstanding to many different customers at any one time, it is simply a matter of time before some of its customers default on their loans. As such, it would be inaccurate for the bank to consider its entire operating profit as income that it will be able to keep. Due to this reality, banks typically report their operating income as a PPOP, to give investors insight into their operating profit, with the understanding that bad debts will still be incurred and reduce the bottom line profit.