Learning Objectives:

  • Understand the commercial banking business model.

  • Identify the key revenue sources for commercial banks.

  • Explain the key performance metrics used to assess bank performance.

4.1 Revenue Sources

Commercial banks generate revenue through two primary sources: net interest income and non-interest income .

Net Interest Income: The spread between the interest earned on loans and the interest paid on deposits, typically 2-4% net interest margin . In both U.S. Bank and Wells Fargo, net interest income makes up a clear majority of their total net revenue .

Non-Interest Income: Fees from various services, including :

  • Cash management and payment processing

  • Loan origination fees (typically 50-200 basis points of loan value)

  • Advisory and syndication fees (35-50% margins)

  • Wealth management services

  • Overdraft fees and monthly checking account fees

  • Safe deposit box rentals

4.2 Key Performance Metrics

Commercial banks monitor several key metrics to assess profitability and risk management :

  • Common Equity Tier 1 (CET1) Ratio: A measure of regulatory capital strength .

  • Fee Income Ratio: Non-interest income as a percentage of total revenue .

  • Return on Equity (ROE): A measure of shareholder return.

  • Return on Assets (ROA): A measure of overall efficiency.

  • Net Interest Margin (NIM): The spread between interest earned and interest paid.

4.3 The Importance of the Deposit Franchise

Competitive moats in commercial banking include the deposit franchise value, switching costs from integrated treasury solutions, regulatory capital requirements creating barriers to entry, and cross-selling opportunities across lending, payments, and advisory services . The deposit franchise—the ability to attract low-cost, stable deposits—is a key competitive advantage.

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