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Money and credit - Ivanov V.M.

23.3. Income, expenses and profit of banks

One of the main goals of commercial banks is to make a profit, which is a source of paying dividends to shareholders, creating bank funds, the basis for improving the welfare of bank employees, etc. The bank's profit is the difference between its gross income and expenses.

Gross income of a bank depends primarily on the volume of its credit investments and investments, the size of the interest rate on loans issued, on the size and structure of the bank's assets.

The main source of income for most commercial banks is the interest charged by borrowers for the use of loans.

Banks receive significant income from operations with foreign currency. This is facilitated by the fact that Ukraine does not have its own freely convertible currency. Another reason for banks to receive high income from operations with foreign currency is the high demand for freely convertible foreign currency from individuals and legal entities in order to protect their funds from depreciation.

Banks can also receive income from operations with securities. But since the securities market in Ukraine is only just beginning to take shape, the banks' income from these operations is still insignificant.

Banks provide their customers a wide range of services: providing guarantees and sureties; settlement, cash services; trusting, consulting, auditing, leasing, factoring services, etc. These operations bring the bank income in the form of a commission and other types of payment for services.

Many banks charge their customers for settlement transactions - transferable, letter of credit, collection. This fee should cover the bank’s expenses for conducting settlement operations, including the bank’s payment to the regional clearing house for electronic payments and to the NBU cash and regional center for regional management for maintaining a bank correspondent account and other operations.

Many banks charge a fee for cash transactions with cash - the reception of cash and its issuance.

The costs of commercial banks, as in any other business sector, can be divided into relatively constant and variable.

Relatively constant are the costs of banks on wages and accruals on it, forms and stationery, maintenance of premises, security, security and fire alarms, depreciation and some others. True, in the long run, these costs are variable.

Variable expenses include interest payments on deposits, deposits and interbank loans, on balances in current accounts. They depend both on the volume of credit resources attracted by the bank, and on their value. These expenses also include fees for the services of the regional clearing house and the regional settlement and cash center for settlement transactions, cash provision. Variables may include bank expenses for advertising, travel expenses, postal and telegraph expenses, etc.

In accordance with the current methodology, commercial banks determine the profit or loss from their activities on a quarterly basis, on the last operating day of the quarter.

Depending on tax laws, banks pay taxes to state and local budgets from profits or from income.

After paying taxes and fines imposed by the tax inspectorate, the National Bank of Ukraine and other bodies, deductions are made from the bank’s profit to its reserve fund in the amount of not less than 5% of the profit remaining at the bank’s disposal. Then deductions are made to the bank's economic incentive funds, to charity and sponsorship events, to pay remuneration to the bank's management. Of the remaining amount, dividends are paid to shareholders.

Losses of the bank following the results of activities for the year are covered by the reserve fund, and if it is insufficient, by reducing the authorized capital. In case of loss-making activities of the bank by shareholders or the National Bank of Ukraine, the issue of the appropriateness of its further functioning, i.e., its preservation, reorganization or liquidation, is decided.

Profit is the most important indicator of the performance of banks. It is used by analysts to determine bank ratings based on their balance sheets.

Correctly defined bank ratings allow customers to select those in which they can invest and invest their capital without risk.