Financial services P&L: banks and insurers
Reading bank and insurer profit: net interest income and margin, fees, cost/income ratio, and credit losses for banks; loss, expense, and combined ratios for insurers.
Key takeaways
- A bank earns the difference between the interest it receives and pays, plus fees, minus costs and credit losses; an insurer earns if premiums exceed claims and expenses, plus investment income.
- Use the right lines (NII, fees, costs, credit losses; or premiums, claims, expenses), build a profit bridge, find the line that moved most, and split it into rate, volume, and risk.
- Financial-services cases are common in offices with large banking and insurance clients, such as London, Frankfurt, Singapore, and Dubai.
- The strong answer uses the industry's own lines, then applies normal profitability logic.
What this case type is and when it shows up
Banks and insurers do not sell products with a cost of goods, so their profit statements look different. Cases on retail banking, corporate banking, insurance, and wealth management are common in financial centres such as London, Frankfurt, Singapore, Dubai, and Mumbai. The skill is knowing the right lines and ratios, then applying the same logic as any profitability case.
Key idea
A bank earns the difference between the interest it receives and pays, plus fees, minus costs and credit losses; an insurer earns if premiums exceed claims and expenses, plus investment income.
The underlying theory, in plain language
Bank lines: interest income on loans minus interest paid on deposits is net interest income (NII). NII divided by average interest-earning assets (mainly loans) is the net interest margin (NIM). Fee income comes from cards, payments, and wealth products. Operating costs are staff, branches, and technology. Credit losses (also called impairments or provisions) are loans expected not to be repaid; as a share of loans they are called the cost of risk.
Two bank ratios matter most. The cost/income ratio is operating costs divided by total income (NII plus fees); lower is more efficient. Return on equity (ROE) is profit after tax divided by shareholders' equity. When interest rates fall, NIM often shrinks, because loan rates fall faster than the rates paid on deposits can be cut.
Insurer lines: premiums are what customers pay; claims are what the insurer pays out. The loss ratio is claims divided by premiums. The expense ratio is operating and sales expenses divided by premiums. The combined ratio is the two added together. Below 100 percent, the insurer makes an underwriting profit; above 100 percent, it loses money on insurance itself and depends on investment income from the premiums it holds before paying claims.
What the prompts sound like, from simple to hard
- Simple: why did a Singapore bank's retail profit fall.
- Medium: how can a Gulf motor insurer return to underwriting profit.
- Hard: should a European bank exit a loss-making lending segment, given capital and customer effects.
Finding and narrowing the real problem
Key idea
Use the right lines (NII, fees, costs, credit losses; or premiums, claims, expenses), build a profit bridge, find the line that moved most, and split it into rate, volume, and risk.
- Financial services profit
- Key: Bank
- Net interest income = loans x NIM
- Fee income
- Operating costs (cost/income ratio)
- Credit losses = loans x cost of risk
- Insurer
- Premiums
- Claims (loss ratio)
- Expenses (expense ratio)
- Investment income
Same logic as any profitability case, with industry-specific lines.
Frameworks for this type, each as a thinking tool with its limit
- Bank profit bridge: Change in profit = change in NII + change in fees minus change in costs minus change in credit losses. Limit: Capital and regulation also shape decisions, beyond profit.
- Combined ratio: Loss ratio + expense ratio; below 100 percent means underwriting profit. Limit: Investment income and reserve changes can hide underwriting problems.
Methods for solving this type
- Lay out the right lines for the industry
- Build a profit bridge between periods
- Split the moving line into rate, volume, and risk
- Compare ratios with peers
- Recommend levers on price, cost, risk, and mix
The math patterns it relies on
- NII = loans x NIM
- Cost/income = costs / (NII + fees)
- Credit losses = loans x cost of risk
- Combined ratio = (claims + expenses) / premiums
Worked cases
Worked case
Why did a Singapore bank's retail profit fall?
The prompt
A Singapore bank's retail unit saw profit before tax fall from SGD 190 million to SGD 115 million. The exhibit shows the main lines. What drove the fall, and what should the bank do?
Interviewer-led: the interviewer shows the table and asks you to find the driver.
Clarifying questions, with the interviewer's answers
- Did the loan book grow?Answer: No, loans were flat at about SGD 20 billion.
- What happened to interest rates?Answer: Market rates fell during the year.
- Is the question about the retail unit only?Answer: Yes, the retail banking unit.
A hypothesis to say out loud: Loans were flat and rates fell, so my hypothesis is that a shrinking net interest margin drives most of the fall, with credit losses possibly adding to it.
The structure
- Bank profit bridge
- Key: Net interest income (loans x NIM)
- Fee income
- Operating costs and cost/income ratio
- Credit losses (loans x cost of risk)
The exhibit
| Line | Last year | This year |
|---|---|---|
| Loans (average) | 20,000 | 20,000 |
| Net interest margin (%) | 2 | 1.7 |
| Net interest income | 400 | 340 |
| Fee income | 100 | 110 |
| Operating costs | 250 | 255 |
| Credit losses | 60 | 80 |
| Profit before tax | 190 | 115 |
Working it through
1. NII this year
SGD 20,000 million of loans at a 1.7 percent NIM, down from 2.0 percent (SGD 400 million last year).
NII this year (SGD m):20,000 × 0.017 = 3402. Credit losses this year
Cost of risk rose from 0.3 to 0.4 percent of loans (SGD 60 million last year).
Credit losses this year (SGD m):20,000 × 0.004 = 803. Profit bridge
NII change, plus fee change, minus cost change, minus credit-loss change.
Change in profit (SGD m):(340 - 400) + (110 - 100) - (255 - 250) - (80 - 60) = -754. Profit this year
NII plus fees minus costs minus credit losses.
Profit before tax (SGD m):340 + 110 - 255 - 80 = 1155. Cost/income ratio last year
Costs divided by NII plus fees.
Cost/income last year (%):250 ÷ (400 + 100) × 100 = 506. Cost/income ratio this year
Costs barely moved, but income fell, so efficiency looks worse.
Cost/income this year (%):255 ÷ (340 + 110) × 100 = 56.67
What the exhibit shows
Net interest income fell by 60, most of the 75 fall in profit. Credit losses added 20; fees partly offset.
The recommendation
Profit fell by SGD 75 million mainly because the net interest margin shrank as rates fell. First, lower NIM cut net interest income by SGD 60 million, most of the fall. Second, credit losses rose by SGD 20 million as the cost of risk went from 0.3 to 0.4 percent, which needs watching. Third, fees grew by SGD 10 million, a sign that fee products can offset part of the rate effect. Actions: review deposit pricing so rates paid fall in line with market rates, grow fee income from wealth and payments, check which loan segments drove the higher losses, and hold costs flat to bring the cost/income ratio back toward 50 percent.
Risks: Cutting deposit rates too fast may lose deposits to rivals; Credit losses may keep rising if the economy slows.
Next steps: Split credit losses by product (cards, personal loans, mortgages); Review deposit rates against competitors.
A strong candidate
Used the bank lines, built a profit bridge, found NIM as the main driver, and flagged credit losses as a second issue.
A weak candidate
Looked for cost of goods sold, or blamed operating costs, which barely moved.
Worked case
A Gulf motor insurer back to underwriting profit
The prompt
A motor insurer in the UAE is losing money. How can it return to profit?
Candidate-led: you ask for the numbers and drive; the interviewer answers what you ask.
Clarifying questions, with the interviewer's answers
- What are premiums, claims, and expenses?Answer: Premiums AED 500 million a year; claims AED 375 million; expenses AED 150 million.
- Does the insurer earn investment income?Answer: About AED 20 million a year.
- Where do the claims problems come from?Answer: Young drivers and suspected fraudulent repair claims.
A hypothesis to say out loud: Motor insurance margins are thin, so my hypothesis is that the combined ratio is above 100 percent and that both claims and expenses need work.
The structure
- Combined ratio = loss ratio + expense ratio
- Key: Loss ratio (claims / premiums)
- Expense ratio (expenses / premiums)
- Investment income
- Levers: pricing by risk, fraud control, digital sales
Working it through
1. Loss ratio
Candidate: "Claims of 375 on premiums of 500 is:"
Loss ratio (%):375 ÷ 500 × 100 = 752. Expense ratio
Expenses of 150 on premiums of 500.
Expense ratio (%):150 ÷ 500 × 100 = 303. Combined ratio
Candidate: "Above 100 percent, so it loses money on insurance itself."
Combined ratio (%):(375 + 150) ÷ 500 × 100 = 1054. Underwriting result
Premiums minus claims minus expenses.
Underwriting result (AED m):500 - 375 - 150 = -255. Total result
Adding AED 20 million of investment income still leaves a loss.
Total result (AED m):500 - 375 - 150 + 20 = -56. After the fixes
Interviewer: "Fraud controls could cut claims by 4 percent, and digital sales could bring expenses to 26 percent of premiums." Candidate: "Then the combined ratio becomes:"
Combined ratio after fixes (%):(375 × 0.96 + 500 × 0.26) ÷ 500 × 100 = 98
The recommendation
The insurer can return to underwriting profit by working on both claims and expenses. First, its combined ratio is 105 percent, so it loses AED 25 million on insurance itself, and investment income of AED 20 million does not cover that. Second, fraud controls on repair claims (about 4 percent of claims) and moving sales to digital channels (expenses to 26 percent of premiums) bring the combined ratio to about 98 percent. Third, pricing by risk, especially higher premiums for young drivers, would improve the loss ratio further. Start with fraud controls, which are quickest, and review young-driver pricing within the rules on motor insurance pricing.
Risks: Higher prices for young drivers may lose volume to competitors; Fraud controls may slow honest claims and hurt customer satisfaction.
Next steps: Set up a fraud review for repair claims above a set amount; Analyze loss ratio by driver age and car type.
A strong candidate
Asked for premiums, claims, and expenses, calculated the combined ratio, and sized fixes on both claims and expenses.
A weak candidate
Proposed selling more policies, which grows the underwriting loss while the combined ratio is above 100 percent.
Prompt: "Why did the bank's profit fall?"
Weaker answer
Uses a manufacturing profit tree with price, volume, and cost of goods, and gets lost.
Stronger answer
Lays out NII, fees, costs, and credit losses, builds a bridge, finds that NIM compression drives most of the fall, and flags rising credit losses.
Why the stronger answer wins: The strong answer uses the industry's own lines, then applies normal profitability logic. The weak one forces a generic tree onto a bank.
Common mistakes, traps, and curveballs
- Looking for cost of goods sold in a bank
- Forgetting credit losses when judging lending growth
- Reading a lower cost/income ratio as worse
- Judging an insurer on profit only, when investment income hides an underwriting loss
- Ignoring interest-rate changes
Financial-services cases are common in offices with large banking and insurance clients, such as London, Frankfurt, Singapore, and Dubai. Interviewers may give a short definition of the lines if you ask. Formats differ by office and change over time, so check the current process for your target office.
Practice
A Mumbai bank has INR 50,000 crore of loans and a net interest margin of 3 percent. What is its net interest income, in INR crore a year?
A UK bank has operating costs of GBP 600 million, NII of GBP 900 million, and fees of GBP 300 million. What is its cost/income ratio, in percent?
A European insurer has premiums of EUR 800 million, claims of EUR 560 million, and expenses of EUR 200 million. What is its combined ratio, in percent?
An insurer has a combined ratio of 103 percent. What does that mean?
Interest rates fall and deposit rates cannot be cut as fast as loan rates. What usually happens to NIM?
A bank's cost/income ratio goes from 50 to 57 percent while costs are flat. What happened?
Use the industry's own lines, NII, fees, costs, and credit losses for banks, and the combined ratio for insurers, then apply normal profitability logic.
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and frameworks
My notes on this lesson
0 of 5,000 characters. Saves automatically.
Try the 6 remaining checks and drills above to complete this lesson (0 of 6 done).
Spotted something wrong or out of date? Report a mistake. We check every report and correct the page.