Most people have an intuitive understanding of how banks money given their daily interactions with it. In this post, we are going to break it down for investors so that they can better analyze the financials.
The biggest money maker – net interest income
At their heart, banks are quite easy to understand and most people do have an understanding of how they work.
Let me use a simple analogy. Imagine you were a money lender – lending money out at let’s say 10%. In order to raise the money that you lend out, you borrow it from your family who trusts you at 5%.
The difference between your cost of borrowing from your family, and the money you lend out is 5% – which represents your spread between the two.
Banks function quite similarly.
Their “borrowing cost” is dictated by bank deposits and money they raised from the markets …