DEFINITION of 'Pre-Provision Operating Profit (PPOP)'

Pre-provision operating profit (PPOP) is 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. A bank will reduce the PPOP once it deducts the dollar amount of bad debt provisions it determines must be set aside to cover expected loan defaults; however, 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 after 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 logical that some will default. 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, banks typically report their operating income as a PPOP, to give investors insight into their operating profit, with the understanding that it could still incur bad debts, which would reduce its bottom line.

Pre-Provision Operating Profit and Default Rates

Delinquency rates on individual consumer loans have fluctuated significantly in the past three decades. The highest was a spike surrounded the 2008 financial crisis, where this figure approached 5%. It has gradually dropped, hitting a trough in 2015 near 2% yet has begun to climb to 2.5% again in 2017. In general, 2016 was a strong year for the consumer credit market overall. More customers participated, with manageable levels of delinquency.

Some concerns surround the slight uptick in the number of credit card and auto loan delinquencies, along with rising interest rates and uncertainty in the political realm regarding new regulations. In general, this is a good sign for banks and their ability to not remove significant funds from their pre-provision operating profit.

Pre-Provision Operating Profit and Other Forms of Income Profitability

Organizations have many forms of describing profitability. The following set of ratios are some but not all of these forms:

While pre-provision operating profit is specific to many banks (less with other organizations), analysts may apply the the above profitability ratios more liberally across companies.

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