Business — Banking — Management — Marketing & Sales

Revenues of the commercial bank

Category: Concept of the Bank and the Banking System

Sources of income of commercial banks are different types of businesses. The elements of the banking business are: business loan, discount business, security business, the guarantee the bank’s activities, business with the securities business based on taking deposits and performing operations on behalf of investors, correspondent relationships with other banks in providing innovative banking services.

Loan business consists of two constituent elements — providing loans to clients (individuals and legal entities) and transfer the temporary use of available resources to other commercial banks for a percentage fee. The second part of the loan business may take the form of interbank loan or a deposit in another bank. Condition of the loan business as a sale of free resources are the presence of lines of operational linkages between the credit institutions, the emergence of reliable intermediaries specializing in the redeployment of resources in the banking market, and expert management of correspondent accounts. Income from lending business is in the form of interest.

Discount-business is based on transactions for buying bank unpaid bills, receipts and demands a certain discount — a discount. Kind of discount business are factoring bank. The latter may be of two types: with recourse (turnover) and non-recourse (without traffic). In the first case, the bank is entitled to charge not barred by the payer of the obligation with the payee (vendor). In the second case of the right bank has no risk and it is therefore more demanding and more solid reward. Reward the bank’s factoring reduces the income provider of products sold, represents a discount to its value. Technology factoring transaction is the fact that the bank pays to the correspondent accounts acquired outstanding claims and considers the amount of payment to the «Calculations of the bank’s factoring and forfeiting operations.

When you receive money from the payer’s bank to the correspondent account in the full amount of the claim, this amount is distributed in three areas: collection of receivables (balance of the account settlement factoring transactions), payment of value added tax and income of the bank (the amount of discount, net of VAT).

Security business based on trust (trust) and agency services that meet and banking operations. This business gives the bank income in the form of fees for property management clients (real estate, securities, funds in the account) or for performing certain specific transactions on behalf of, the related assets. For example, based on the trust agreement the bank is committed to placing client funds, undertaking to ensure that last a certain level of income. When the client agent services clearly specifies the contents of the operation to deploy its resources. When trust operations risk is greater due to the fact that the client’s income due to the treaty may be less than the income of the bank. Accordingly, the fee for trust services is higher than for agency operations. This feature determines the structure of commission fees for trust services. It usually includes a fixed fee for managing the property and pay for performance, if the income from trust operations is higher than the contractual client’s income and fixed-fee bank.

Business in securities made up of these constituents, as output by the bank securities and their realization in the market, placing securities on behalf of, investment in securities of other elements to produce a steady income, or for resale, providing services to privatize. The bank’s income from the type considered commerce consists of foreign exchange by selling securities, dividends, interest income on debt, income from the resale of the securities (speculative gains) received the commission for services to privatization, the placement of securities, etc. In this connection with a regular revaluation of securities portfolio income of the bank also formed due to the positive difference this reassessment.

Guarantee the bank’s activity gives a direct monetary income in the form of or related to an indirect benefit. For the issuance of various forms of guarantees and warranties to its customers for their calculations and obtain a loan the bank may receive a commission in cash. There’s also free warranty work when the client is profitable for the bank in terms of maintaining the image, get the best services, etc.

Business related to deposits and transactions on behalf of depositors, provides an opportunity to earn income in the following ways:

• commission for:

a) opening an account;

b) keeping accounts;

fixed fee for the period (in monetary units);

commission on turnover (% of turnover);

a) providing statements of account transactions;

d) closing the account;

d) Implementation of cash withdrawal transactions of money or current nature.

The bank’s income from the reporting lines of business, may consist of any or all of these awards.

Source of income may be the correspondent relationship, when the bank receives a percentage of the credit balances on correspondent accounts in another bank or banking association. Income depends on the level of interest rates, the order of interest, size and duration of the credit balance.

Income from non-traditional banking services consists of income from leasing, information, consulting services, training services clients, and others income from leasing transactions include the lease payments, interest payments and fees for services.

Extraordinary income (unexpected) nature related to the single transaction for the sale of property of the bank. Revenue generated in the case of excess of market price over the book valuation. Otherwise, the operations associated with the flow, which forms a direct loss of the bank.

Thus, all income of a commercial bank in the form can be divided into three groups: 1) interest income, 2) income in the form of commission, and 3) Other (income from operations on the speculative nature of the difference between book value and market price of property sold , revaluation of securities and other assets received fines, penalties, discount income).

Interest income can be combined with the commission. For example, when credit bank may receive both interest payments and commission. Commission for various services can be combined. For example, fees for arranging a loan or a bond placement may involve a fee for counseling. The latter will be received by the bank only if the deal goes through.

Revenue from services in all these forms must recover costs of the bank, to cover the risks and make profits. Another common feature of all forms of income is their value in nature. Price in the banking market, like any other, is influenced by supply and demand. At the same time, each form of income has its own specifics.

Judgement interest is the original price, lendable temporary use value. Classification of interest on loans based on forms of credit (commercial interest, bank, consumer, etc.), types of credit institutions (the Central Bank rate of discount, bank, Lombard), the date loans (loans or short-term money market rates, long-term loans or rates on bond loans), the types of loans (interest on loans for working capital, overdraft, accounting bills, the trust loans, etc.), types of transactions (interest on loans, interbank loans, deposit), by the way calculation (simple and compound interest, ordinary and accurate, etc.).

Regardless of the type of contractual lending rate is based on the price of credit resources and the margin required for the commercial bank. The price of credit should be considered not a market (the price of resource mobilization), and real. Deviation of the real price of resources from the market is influenced by the required reserves of the order of allocating the interest expense on the bank’s cost and the current tax system. Sufficient for the bank’s net interest margin should cover banks costs and create profit. In addition, the percentage of the contract should take into account inflation and banking risks.

The Commission — the name of fees for banking transactions (services), which comes from the Latin word «comissio» (instruction). The basis of determination of its size are the cost of services and the necessary profit. But depending on supply and demand in the market of this type of banking services commission (rate) may be higher or lower cost. Regular monitoring of the actual cost of services and the deviation of the cost of the market price can develop interventions to reduce the cost of services, the direction of their development, etc.

The basis of classification of income may be based upon the accounting system. In accordance with a system for recording income are the following types of them: 1) the interest received for loans, and 2) revenues generated from securities transactions, and 3) income from operations with foreign currency and other currency values; 4) dividends received, and 5) income from banking institutions; 6) fines, penalties received, and 7) other income. Each balance sheet account of second-order accounts are opened analytical accounting, which allows to allocate revenues by type of counterparty (payers), to form, the degree of stability.

Depending on the period to which the revenue, they are divided into income for the current period and deferred income.

Revenue sources are divided into stable and unstable. For relatively stable sources of income include interest income and interest income from banking services, unstable — Income from operations with securities on the secondary market from unexpected (extraordinary) operations. In our situation, many banks may include a group of unstable sources of income from foreign exchange transactions. Desirable direction of development bank is a revenue growth due to stable sources, no significant effects on unstable sources of income growth in net profit.

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