Trade Management in Action

A large number of research studies over the years have examined the top-earning banks in the industry on an effort to answer a simple question: What distinguishes a bank with above average profitability from banks that are only average performers? How did top-earning banks get that way?
Bank size is clearly one factor. The top earning banks in the industry, at least as measured by their ROA are usually small to medium-size institutions (ranging form $100 million to perhaps a few billion dollars of assets), that seem to benefit from lower overall operating costs. On the other hand, when profitability is measured by the returns to the banks owners (ROE), the largest banks in the industry often lead the pack, fueled by their greater use of financial leverage (i.e., using less equity capital and more debt to fund their assets).
Expense control stands out as the most important discriminator between top performers and the also-rans. High profit banks manage their operating expenses better, generally posting lower average interest cost, and especially lower personnel expenses and overhead. Their ratios of operting expenses to operating revenues tend to be significantly below the expense-to-revenue ratios of low-profit banks.
The deposit structure of banks also appears to influence their profit performance. Top-earning banks often hold more demand deposits than other banks; these checkable deposits pay little or no interest and carry customer service fees that help to bring in more revenues. Relatedly, many highly profitable banks hold a large volume of core deposits, smaller denomination deposits from individulas and small businesses that pay low interest rates and are more loyal to the bank than larger deposit accounts.