how-do-banks-make-money

How Do Banks Make Money? Banks Business Model In A Nutshell

Banks like JPMorgan, Bank of America and Goldman Sachs make money with consumer banking, investment baking, commercial banking, and asset and wealth management. Those banks collect fees for the services provided. Also, banks earn on the interests of money borrowed. A critical metric to assess the success of any bank is its ability to attract assets under management. For instance, in 2017 JPMorgan managed over two trillion of assets, while Goldman Sachs managed almost one and a half trillion and Bank of America over a trillion.

How does JPMorgan make money?

JP Morgan Net Revenues in 2017

Consumer & Community Banking $46.48B
Corporate & Investment Bank $34.49B
Commercial Banking $8.60B
Asset & Wealth Management $12.91B
Corporate $1,14B

JPMorgan operates four major reportable business segments:

  • Consumer & Community Banking
  • Corporate & Investment Bank
  • Commercial Banking
  • Asset & Wealth Management.
  • Corporate

segments-results-jpmorgan

The strongest segment for JPMorgan is the consumer and community banking with over $46 billion in revenues a 17% return on equity (ROE) and a net income of $9.4 billion. This segment comprises a customer base of 61 million U.S. households and 4 million small businesses. Those customers had 97 million debit and credit card accounts and spent over $900 billion on those cards in 2017.

The primary operating segments of JPMorgan Chase are summarized below:

jpmorgan-chase-business-segments

Source: JPMorgan Chase Annual Report (2017)

How does Goldman Sachs make money?

Goldman Sachs Net Revenues in 2017

Investment Banking $ 7.37B
Institutional Client Services $11.90B
Investing & Lending $6.58B
Investment Management $6.21B

Goldman Sachs is a leading global investment banking, securities and investment management firm. Goldman provides a wide range of financial services that are reported under four business segments:

  • Investment Banking
  • Institutional Client Services
  • Investing& Lending
  • Investment Management

The four primary segments and the services offered for each are described below:

goldman-sachs-business-segment

Source: Goldman Sachs Annual Report (2017)

The Institutional Client Services services are the largest segment of the bank. I comprise fixed income, currency and commodities client execution. This segment is followed by investment banking, investing and lending and investment management.

If we look at Goldman Sachs revenues based on the primary services provided:

revenues-by-line-goldman-sachs

Source: Goldman Sachs Annual Report (2017)

Investment banking together with market making are the primary sources of income. The market is making consists on having a reserve of certain financial instruments so that when a buyer or seller of that financial instrument is willing to make a transaction, she/he will be able to do so, even in the absence of a buyer/seller on the other side. Indeed, the market maker is the one acting as a counterpart, thus making the transaction possible. This ensures market liquidity and smooth transactions even when none is queuing on that transaction.

Those market-making revenues consist of revenues (excluding net interest) from client execution activities related to interest rate products, credit products, mortgages, currencies, commodities and equity products.

How does Bank of America make money?

Bank of America net revenues in 2017

Consumer Banking $34,5B
Global Wealth & Investment Management $18,6B
Global Banking $20B
Global Markets $15,9B
All Other -0.78B

Bank of America has four business segment:

  • Consumer Banking
  • Global Wealth & Investment Management
  • Global Banking
  • Global Markets

The largest segment is Consumer Banking which comprises. Deposits and Consumer Lending, including traditional savings accounts, money market savings accounts, CDs and IRAs, noninterest-and interest-bearing checking accounts.

Deposits generate fees such as account service fees, non-sufficient funds fees, overdraft charges, and ATM fees, as well as investment and brokerage fees from Merrill Edge accounts.

Consumer Lending generates interchange revenue from:

  • credit and debit card transactions
  • late fees
  • cash advance fees
  • annual credit card fees

bank-of-america-financial-highlights

Source: Bank of America Annual Report (2017)

Below the primary segments and all the related activities of Bank of America:

bank-of-america-segments

Who manages the most assets under management among JP Morgan, Bank of America and Goldman Sachs banks?

Total Assets Managed

JPMorgan Bank of America Goldman Sachs
2016 $1,771B $886B $1,379B
2017 $2,034B $1,080B $1,494B

Massive banks like JPMorgan, Bank of America, and Goldman Sachs manage from billion to trillion of assets. Indeed, a key metric to assess the success of any bank is its ability to attract client’s assets. In short, banks manage those assets for the clients and earn commissions on the asset management performed.

For, instance, in 2017 JPMorgan managed over two trillion of assets, while Goldman Sachs managed almost one and a half trillion and Bank of America over a trillion. This metric of the assets under management is critical to assess the business model sustainability of those banks as it is also a measure of trust clients might have toward those banks.

Who makes more revenues among JP Morgan, Bank of America and Goldman Sachs banks?

Total Net Revenues

JP Morgan Bank of America Goldman Sachs
2016 $95.66B $83.70B $30.60B
2017 $99.62B $87.35B $32.07B

At revenue level, JPMorgan made almost $100 billion in 2017, compared to over $87 billion of Bank of America and over $32 billion of Goldman Sachs.

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Published by

Gennaro Cuofano

Creator of FourWeekMBA.com | Head of Business Development at WordLift.io | International MBA

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