Where Do US Bank Profits Come From? An Exact Decomposition of Return on Assets, 1934–2025, and What Drives Its Variation
Year: 2026
Type: preprint
Abstract: Using the FDIC's Historical Bank Data for all US commercial banks, 1934 to 2025, I decompose return on assets exactly into net interest income, noninterest income, noninterest expense, loan loss provisions, securities gains, taxes and extraordinary items, each as a share of average assets. The accounting identity holds to 10⁻¹⁵ points with a residual of at most 0.0065 points. Over the full period the level of ROA rose from 0.38% in the 1930s to 1.09% in the 2020s, mainly because fee income grew from 0.47% of assets in the 1940s to 2.27% in the 2000s while net interest income rose less and expenses absorbed much of both. A covariance decomposition shows that provisions account for 85% of the variance of year-to-year changes in ROA over 1936 to 2025 and 96% over 1984 to 2025, while net interest income accounts for about 15%. Provisions run close to charge-offs on average (median ratio 1.008), but they surged to 2.5 times charge-offs in 2020, the first year of the expected-loss (CECL) standard and the pandemic, and were negative in 2021. Finally, ROE rose only from 11.12% in 1985 to 11.83% in 2025 although ROA rose by 0.562 log points, because leverage fell from 16.2 to 9.8 times equity.
Author: Aguru, Manoj Kumar
Institution: Chaitanya
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W7224131642