Financial services (1 of 5)

Retail and commercial banking

About 11 minutes to read in full, or 1 minute for the short version belowFacts checked 30 September 2026

In one minute

Banks keep people's and companies' money, lend it out to families and businesses, and move payments, earning mostly from the gap between what borrowers pay and what savers get.

The big idea: A bank borrows cheaply, mostly from depositors, and lends at a higher rate, and that gap is most of its income. Its profit is what is left after running costs and the loans that are never repaid. Every loan also ties up some of the owners' own money (capital), so the real test of a loan is its return on that capital, not its interest rate.

One unit, in numbers: One personal loan of one lakh rupees held for one year by a private bank in India: INR 14,000 comes in, and INR 2,000 (14%) is left after its own costs.What is left is the unit's contribution, before the costs of the whole company. See the worked example
Typical margin: About 25 to 45 percent of total income as profit before tax in normal yearsRoughly how much of every 100 of sales (or income) is left as profit after the running costs. More on margin
Capital intensity: HighA lot of money must be tied up before the business earns anything, so the return on that money matters as much as the margin. More on capital intensity
The number to watch: Net interest margin (NIM)Interest earned minus interest paid, divided by the loans and bonds that earn interest: the bank's spread in one number.

Ask this first in a case

Which country, and what is happening to interest rates there?

Words used above (3)

Spread:: The gap between the rate a bank charges on loans and the rate it pays for its money.
Net interest margin:: Net interest income divided by the assets that earn interest.
Capital (equity):: The owners' own money in the bank, which absorbs losses before depositors lose anything.

The industry's other words are explained in Words to know (12).

On this page (17 sections)

How money is made

Net interest income: interest earned on loans and bonds minus interest paid on deposits and borrowing; about 58 percent of EU banks' income in mid 2026.
Fees and commissions: cards, payments, account fees, wealth and insurance sales, and trade finance; about 29 percent of EU banks' income in mid 2026.
Trading and markets income, mainly at large banks that serve companies and investors; about 7 percent of EU banks' income in mid 2026.
Islamic banks earn a profit rate through sale (murabaha), lease (ijara) and partnership contracts instead of interest, which behaves much like net interest income.
Cross-selling: a salary account opens the door to a card, a loan, insurance and savings products, each adding income on the same customer.

Worked example: one unit

Unit economics means the money in and out for one unit of the business. Start from the revenue, take away the unit's own costs, and what is left is its contribution. More on unit economics

The unit: One personal loan of one lakh rupees (INR 100,000, written 1,00,000 in India) held for one year by a private bank in India. Illustrative, rounded figures.
Line	Amount	ShareShare of revenue
Interest charged at 14 percent a year	INR 14,000	100%
Minus Funding cost: interest the bank pays for the money, 7 percent	INR 7,000	50%
Minus Operating cost: staff, systems, branches and servicing, 2 percent	INR 2,000	14%
Minus Expected credit losses: the share of loans that go bad, 3 percent	INR 3,000	21%
What is left (contribution)	INR 2,000	14%

Check: INR 14,000 minus INR 12,000 of costs leaves INR 2,000.

So what: The loan keeps INR 2,000 before tax, about INR 1,500 after 25 percent tax, while the bank must hold about INR 12,000 of its own capital against it: a return on equity of about 12.5 percent, below a 14 percent cost of equity. Credit losses are the lever that moves it most: cutting them from 3 to 2.5 percent adds INR 500 before tax and lifts the return to about 15.6 percent. (To keep it simple, the funding cost is charged on the whole loan, although the bank's own capital pays for part of it.)

Key measures(10)

Key measures (also called KPIs, key performance indicators) are the numbers people in this industry track. Ask for the first one or two early in a case.

Net interest margin (NIM)
Interest earned minus interest paid, divided by the loans and bonds that earn interest: the bank's spread in one number. Glossary: Net interest margin (NIM)
Typical: About 3.3 percent for US banks and about 1.6 percent for EU banks in mid 2026. India and Japan are in the benchmarks below: higher in India, about 1 percent or less in Japan[2]
Cost to income ratio
Running costs divided by total income; lower means more efficient. Glossary: Cost to income ratio
Typical: About 51.5 percent for EU banks in mid 2026; below about 50 percent is usually seen as efficient[3]
Return on equity (ROE)
Profit after tax divided by the owners' money in the bank; it should beat the cost of equity, the return owners expect. Glossary: Return on equity (ROE)
Typical: About 11 percent for EU banks in mid 2026; owners often expect about 10 to 15 percent[3]
CET1 ratio
The best-quality capital (common equity tier 1) divided by risk-weighted assets, where riskier loans count for more: the cushion that absorbs losses before depositors lose anything.
Typical: Basel minimum 4.5 percent plus a 2.5 percent conservation buffer; EU banks averaged about 16 percent in mid 2026 and Indian banks about 15 percent in March 2026[7]
Loan to deposit ratio
Loans divided by deposits; near or below 100 percent means loans are mostly paid for by deposits rather than market borrowing. Glossary: Loan to deposit ratio
Typical: About 106 percent for EU banks' loans to households and companies in mid 2026[3]
Cost of risk
Credit losses in the year divided by average loans: how much of the loan book goes bad. Glossary: Cost of risk
Typical: About 0.5 percent of loans for EU banks in mid 2026; much higher for cards and personal loans than for home loans[3]
Non-performing loan (NPL) ratio
Loans that are usually 90 days or more overdue, divided by all loans; a rising NPL ratio warns of future losses. Glossary: Non-performing loan (NPL) ratio
Typical: About 1.8 percent for EU banks in mid 2026, and a gross NPA ratio of 1.8 percent for Indian banks in March 2026[4]
Liquidity coverage ratio (LCR)
Cash and easy-to-sell assets divided by the money that could leave in 30 days of stress; it must be at least 100 percent. Glossary: Liquidity coverage ratio (LCR)
Typical: About 158 percent for EU banks in mid 2026 and 124 percent for Indian banks in March 2026[3]
Return on assets (ROA)
Profit divided by total assets; small numbers are normal because a bank's assets are huge.
Typical: About 1.37 percent for US banks in the second quarter of 2026 and about 0.8 percent for EU banks[1]
CASA ratio
Current and savings account deposits as a share of all deposits; higher means cheaper funding. Widely watched in India. Glossary: CASA ratio

First questions to ask

When a case lands in this industry, these questions get you to the numbers that matter.

Which country, and what is happening to interest rates there?
Which customers and products: retail, small business or large companies; mortgages, cards or business loans?
Which line of the profit tree moved most: net interest income, fees, running costs or credit losses?
How is the bank funded: what share is cheap current and savings accounts?
How much capital does the plan need, and what return on equity does the bank target?

Value chain: where the margin sits

The value chain is the steps a product or service passes through, from the first supplier to the customer. Each step below shows how much of the value it keeps. More on value chains

Step 1: Gather deposits and other funding
Fat margin
Banks take current, savings and time deposits; they also borrow from other banks, bond investors and the central bank
Current and savings accounts pay little or no interest, so a bank with many salary accounts has the cheapest raw material in the industry.
Step 2: Decide who gets credit and at what price (underwriting)
Medium margin
Bank credit teams, helped by credit bureaus (such as Experian, or CIBIL in India) and scoring models
Pricing the risk right is where a lender wins or loses: too strict and it lends too little, too loose and losses eat the margin.
Step 3: Lend and hold the loan on the balance sheet
Margin varies
Banks, non-bank lenders (NBFCs such as Bajaj Finance in India), and private credit funds for company loans
Home loans earn a thin spread with low losses; credit cards and personal loans earn a wide spread but lose far more to bad debts.
Step 4: Move money: payments, cards, cash management and trade finance
Medium margin
Banks, card schemes (Visa, Mastercard, RuPay), processors, and national real-time systems (UPI, Pix, SEPA Instant)
Fee income that needs little capital, but real-time payment systems with low or zero fees are squeezing it.
Step 5: Service the loan and collect repayments
Thin margin
Bank operations and collections teams, outsourced collection agencies
A cost centre, but good collections directly cut credit losses.
Step 6: Manage interest rate and liquidity risk (treasury)
Margin varies
Bank treasury teams; the central bank as lender of last resort; investors who buy packaged loans
Treasury keeps enough cash for withdrawals and limits the damage when rates move.
Step 7: Sell wealth, insurance and advice to the same customers
Fat margin
Bank wealth and private banking arms, insurers selling through bank branches (bancassurance)
Fees on customers the bank already has, with little capital needed.

Profit pool: who keeps the money

Where in the value chain the profit ends up, which is often not where most of the sales are. More on profit pools

The profit sits where cheap funding meets good lending: banks with many current and savings accounts and disciplined underwriting earn the best returns. Fee businesses such as payments, wealth and bancassurance need little capital, so they punch above their weight on return on equity. Home loans are high volume but thin, and unsecured lending is high margin only until losses rise.

Cost structure(4)

The main costs, each as a share of revenue (the money from sales).

Staff pay, the largest single running cost (shares here are of total income, not of loans): Roughly 25 to 30 percent of total income; about 29 percent for EU banks in mid 2026 (calculated from the EBA figures)[3]
Technology, branches, premises and other running costs: Roughly 20 to 25 percent of total income; about 22 percent for EU banks in mid 2026 (calculated)[3]
Credit losses (loan impairments); EU banks' cost of risk was about 0.5 percent of loans in mid 2026: Often 5 to 15 percent of total income in normal years, far more in a crisis; about 8 percent for EU banks in mid 2026 (calculated)[3]
Profit before tax (what is left): Often 25 to 45 percent of total income; about 39 percent for EU banks in mid 2026 (calculated)[3]

Benchmarks(9)

Typical figures for the industry, to check a client's numbers against.

Net interest margin, US banks, second quarter 2026: 3.32 percent[2]
Net interest margin, EU and EEA banks, mid 2026: 1.63 percent[3]Europe runs at about half the US margin, one reason EU banks work so hard on costs.
Net interest margin, Indian banks, July to September 2025: About 3.9 percent at private banks and about 2.7 percent at state-owned banks[5]Margins fell a little in 2025 as the RBI cut rates, because loan rates follow policy rates faster than deposit rates.
Interest spread on domestic loans, Japanese banks, fiscal 2025: About 1 percent or a little less, after years of near-zero rates[6]Read from a Bank of Japan chart; the spread widened in fiscal 2025 as yen rates rose.
Return on assets, US banks, second quarter 2026: 1.37 percent[1]
Income mix, EU and EEA banks, mid 2026: About 58 percent net interest, 29 percent fees, 7 percent trading[3]
CET1 ratio, EU and EEA banks, mid 2026: About 16.1 percent[3]Far above the 7 percent of minimum plus conservation buffer.
Gross NPA ratio and credit growth, Indian banks, 2025 to 26: Bad loans 1.8 percent of loans in March 2026, a multi-decade low; credit growth 14.5 percent[4]
Islamic finance assets worldwide, end of 2024: About USD 3.88 trillion, with the Gulf holding about 53 percent[15]

Typical cases(7)

Case prompts you might hear in this industry.

Our retail bank's profit fell 15 percent even though loans grew. Why, and what should we do?
Should we close a third of our branches as customers move to the app?
Should we launch a digital bank in the Gulf or in Southeast Asia?
Should we grow our credit card and personal loan book?
Two mid-sized banks want to merge. Does the deal make sense?
Should we open an Islamic banking window for our customers?
A digital bank is taking our young customers. How should we respond?

Common traps(5)

Mistakes candidates make in this industry, and what to do instead.

Looking for cost of goods sold. A bank's "raw material" is money, so use the bank profit tree: net interest income, fees, running costs, credit losses.
Treating deposits as the bank's own money. They are debts the bank owes; the owners' money is equity (capital).
Growing loans without asking about credit losses and capital. A 30 percent interest rate can still destroy value once losses and capital are counted.
Forgetting that deposit rates move more slowly than loan rates, so a rate change squeezes or widens the margin for a while.
Reading a lower cost to income ratio as worse. Lower is better.

What changed, 2024 to 2026(6)

Recent changes a case could turn on.

Rates turned up again in 2026 after cuts in 2024 and 2025: the US Federal Reserve raised its range to 3.75 to 4 percent on 16 September 2026, and the ECB raised its deposit rate to 2.50 percent. Rising rates usually widen margins at first and raise bad loans later.[9]
Bank profits stayed strong: EU banks reported a return on equity of about 11 percent and a cost to income ratio of about 51.5 percent in mid 2026 (EBA), and US banks a net interest margin of 3.32 percent and a return on assets of 1.37 percent (FDIC).[3]
Capital rules may loosen in the US: on 19 March 2026 regulators re-proposed the final Basel III rules with lower requirements than the 2023 plan. These are proposals and may change.[12]
Indian banks are in their best shape in decades: bad loans fell to 1.8 percent of loans in March 2026 while credit grew 14.5 percent in 2025 to 26, with the repo rate held at 5.25 percent in August 2026.[4]
Gulf risk rose: from 28 February 2026 a conflict involving Iran, Israel and the United States sharply cut shipping through the Strait of Hormuz, with effects on Gulf banks' borrowers and deposits still unfolding.[14]
Islamic finance keeps growing: industry assets reached about USD 3.88 trillion at the end of 2024, up 14.9 percent in a year.[15]

Players by region(7)

Well-known companies in each region. You do not need to learn them by heart; they help you picture the market.

Global: ICBC, Agricultural Bank of China, China Construction Bank and Bank of China (the four largest by assets in 2025)
JPMorgan Chase (fifth by assets)
HSBC
MUFG (Japan)
Europe: HSBC, Barclays (UK)
BNP Paribas (France)
Santander (Spain)
Deutsche Bank (Germany)
ING (Netherlands)
Digital: Revolut, Monzo, N26
Middle East: First Abu Dhabi Bank, Emirates NBD (UAE)
Saudi National Bank, Al Rajhi Bank (Saudi Arabia, Islamic)
QNB (Qatar)
Kuwait Finance House (Islamic)
Digital: Wio (UAE), STC Bank (Saudi Arabia)
India: State Bank of India (state-owned)
HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank
Non-bank lenders (NBFCs) such as Bajaj Finance
Southeast Asia: DBS, OCBC, UOB (Singapore)
Maybank (Malaysia)
BCA, Bank Mandiri (Indonesia)
Digital banks licensed in Singapore: GXS (Grab and Singtel), MariBank (Sea)
United States: JPMorgan Chase, Bank of America, Citigroup, Wells Fargo
Digital: Chime, SoFi
Africa: Standard Bank, FirstRand, Absa (South Africa)
Equity Bank, KCB (Kenya)
Ecobank (pan-African)
Mobile money such as M-Pesa

Words to know(12)

Linked words have a fuller entry in the glossary.

Deposit: Money a customer places with the bank; for the bank it is a debt it must repay.
Spread: The gap between the rate a bank charges on loans and the rate it pays for its money.
Net interest margin (glossary entry): Net interest income divided by the assets that earn interest.
Capital (equity): The owners' own money in the bank, which absorbs losses before depositors lose anything.
Risk-weighted assets: Loans and other assets weighted by how risky they are; capital rules are set as a share of these.
CET1 ratio: The best-quality capital divided by risk-weighted assets.
Cost of risk (glossary entry): Credit losses in a year as a share of average loans.
Non-performing loan: A loan whose borrower has stopped paying, usually for 90 days or more.
CASA ratio (glossary entry): Current and savings deposits as a share of all deposits; a high CASA ratio means cheap funding.
Deposit beta (glossary entry): The share of a market rate change that a bank passes on to its depositors.
Basis point: One hundredth of a percentage point: 25 basis points is 0.25 percent.
Murabaha (glossary entry): An Islamic finance sale: the bank buys an asset and sells it to the customer at cost plus an agreed profit, paid in instalments.

Business model patterns

The ways of making money this industry follows. Spot the pattern in a new industry and you already know the first questions to ask.

Sources(15)

Facts checked on 30 September 2026. Worked examples are illustrative, shaped by these sources rather than one company's figures.

Go deeper and practise

Go deeper

The full lessons behind this brief, with sources and worked cases.

Practise it

Same pattern elsewhere

Industries that make money in a similar way. What you learned here carries over.