27 Aug Increasing Bank ROA (RETURN ON ASSETS)
Return on Assets for banking is defined as Net Income divided by Total Assets.
Net Income = Fee income + Interest income – operating expense
Total Assets = Deposit Accounts + Bank Capital
ROA is an important factor when measuring how effectively the bank makes income outside of lending. While this is usually a small portion of bank revenues it can be essential to cash flows when net interest margin is stretched and available loans are limited.Can the bank shift from interest income to fee income and continue to make money?
Mercantile Processing Inc is a full service business banking product provider. We specialize in working with our bank partners to increase net income which ultimately increases bank ROA. The primary way to increase ROS on business deposit accounts in merchant services, but can also be increased through fee income on payroll services, point of sale systems and gateway revenue. When opening a deposit or lending relationship fee relationships should also be discussed and MPI specializes in showing banks how to do this well.
The best time to talk about fees is during the loan conversation. If a bank is competing for a loan often the rate and the terms are what differentiates a bank. The bank should set themselves above the competition by creating a package. Loan offer should have interest rate, savings on merchant and payroll fees and any interest earned on interest bearing accounts. A few examples below:
First example is a $500,000 business loan amortized at 20 years for 5%. Loan comes with $100,000 in deposits and the merchant services is worth $2,000 a year in fee income if you match their current rates. This means the ROA on this loan is 2% ($100,000 deposit / $2,000 fee income). If you consider this revenue as part of the loan you can swing the loan rate lower by 20 basis points and still make the same revenue. This will allow you to be more competitive and/or you can take a slightly riskier loan knowing the revenue potential.
Second example is a $100,000 line of credit with a rate of 6%. Loan comes with $100,000 in deposits and a payroll account worth $1,500 a year. This is a 1.5% ROA on the deposit. If the loan is maxed out then the total revenue is $7,500 including thre payroll account for a return of 7.5%.
Most banking relationships don’t end up this neatly packaged, but bankers must start thinking about the entire relationship of a customer. Most banks have a tendency to have a deposit focus, or a loan focus, or a fee focus for a specific period of time. These marching orders are easy to disseminate to all bank employees. The higher level employees such as loan officers and business development officers should be able to look at a whole relationship and evaluate its profitability. The shotgun method of get as many deposits as possible and as many loan applications as possible is going by the wayside and bankers need to start thinking like a business owner. How do I maximize my business and my margins.
“Managers today have to do more with less, and getter better results from limited resources, more than ever before” – Brian Tracy
Mercantile Processing INC(MPI) is a merchant services firm formed in 2006. MPI’s focus on community banks has led to exponential growth for both MPI and its bank partners. For a free review of your current ROA ro Merchant Program please reach out.
Call 1-877-508-2831 or email partnersupport@mpiprocesssing.com