A:

The average net profit margin for retail or commercial banks, as of January 2015, is approximately 18%. This compares favorably with the current overall market average of approximately 8%. The profit margin for regional banks tends to be higher than that of money center banks, nearly 23% on average. Investment banks operate with lower profit margins, currently averaging around 13%. But since investment banks deal in very large capital amounts, a 13% net profit for a given investment bank may represent an absolute dollar amount substantially higher than the amount represented by an 18% profit margin realized by a retail bank.

It is somewhat difficult to even talk about an average profit margin for the banking industry. Profit margins between different banks can vary from as low as 5% up to as high as nearly 45%. Proper analysis would only compare banks similar in the major business they conduct, their sizes and the specific marketplaces they serve. It isn't valid to compare a regional retail bank to a large investment bank, nor is it valid to compare an investment bank in India to an investment bank in the United States.

Investors and analysts can use equity valuation metrics to assess banks. The net interest margin is, for banks, a similar measure to gross profit margin for most companies, calculated by subtracting total interest expense from the bank's total interest income. Interest income for banks comes primarily from issuing loans. Interest expenses represent the interest that banks must pay on the variety of deposit accounts held by the bank's customers.

The efficiency ratio is another commonly used metric for evaluating banking firms. The goal for banks is to keep efficiency ratios low, because they represent non-interest operating expenses as a percentage of the bank's total income. Efficiency ratios for the banking industry typically fall between 60% and 70%. Banks with assets over $1 billion tend to operate more efficiently.

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