# The back-of-envelope maths and due-diligence checks professionals run
A bank's annual report can run 400 pages. The professional who knows what they're doing reads three lines from it and reaches for a calculator. From those three lines they can tell you whether the bank is making money on its core business, whether it earns a decent return for shareholders, and whether one bad quarter would wipe out its safety buffer.
This lesson teaches you those three calculations, then hands you a checklist to pressure-test any bank or fintech before you trust its numbers.
A bank makes money in two broad ways. It borrows cheap (deposits, wholesale funding) and lends dear (loans, mortgages), pocketing the spread. That is net interest income (NII). It also charges fees for cards, advice, payments, and asset management: that is non-interest income.
Everything below flows from a bank's balance sheet, so learn two anchor terms:
Scale check, all figures estimates as of early 2026: US commercial bank total assets sit around $24 trillion (see the Federal Reserve's H.8 release for the live number). The euro area banking sector is broadly comparable in size. The US market is dominated by a handful of giants (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo); Europe is more fragmented across national champions (BNP Paribas, Santander, Deutsche Bank, ING, UniCredit).
NIM tells you how much a bank earns on its lending after paying for its funding, as a percentage of the assets doing the work.
Formula:
NIM = Net Interest Income / Average Earning Assets
Worked example. A mid-size bank reports:
NIM = 2.0 / 80 = 2.5%
So the bank nets 2.5 cents of interest for every dollar of earning assets.
Benchmark: US banks have run roughly 2.5% to 3.5% NIM in recent years (estimate). European banks typically sit lower, often 1.2% to 2.0%, partly a legacy of years of near-zero and negative rates that compressed spreads. A NIM well above peers is a flag: it might mean excellent deposit franchise, or it might mean the bank is lending to riskier borrowers at higher rates.
Shareholders care about return on the money they put in. Return on equity (ROE) measures profit against total equity. But professionals prefer ROTE, which strips out intangibles like goodwill (the premium paid in past acquisitions that isn't a real, sellable asset). ROTE shows the return on the hard capital that can actually absorb losses.
Formula:
ROTE = Net Profit / Average Tangible Equity
where Tangible Equity = Total Equity minus Goodwill and Intangibles.
Worked example. A bank reports:
Tangible equity = 30 minus 5 = $25 billion.
ROTE = 3.0 / 25 = 12%
Benchmark: Investors typically treat 10% to 12% ROTE as the rough dividing line between value-creating and value-destroying, because that's around a bank's cost of equity. Leading US banks have posted mid-teens ROTE recently; many large European banks have finally pushed above 12% after a lost decade, helped by higher rates (all estimates, 2025 reporting).
Regulators force banks to hold capital as a shock absorber. The key ratio is the CET1 ratio (Common Equity Tier 1: the highest-quality capital, mostly shares plus retained earnings, divided by risk-weighted assets).
RWAs (risk-weighted assets) are the bank's assets adjusted for riskiness. A government bond might carry a 0% weight; an unsecured corporate loan close to 100%. So $100 of mortgages might count as only $35 of RWAs.
Formula:
CET1 ratio = CET1 Capital / Risk-Weighted Assets
Worked example, calculating headroom. A bank reports:
CET1 ratio = 60 / 400 = 15%
Say its regulatory minimum plus buffers requires 11%. Its headroom is 4 percentage points.
How much loss could that absorb? 4% x $400bn RWAs = $16 billion before it breaches the requirement. That single number tells you how much stress the bank can eat.
Benchmark: Large US and European banks typically run CET1 ratios of 12% to 15% (estimate, 2025). The rules come from the Basel framework (international standards set by the Basel Committee), implemented in the US by the Federal Reserve, OCC and FDIC, and in Europe via the Capital Requirements Regulation (CRR) overseen by the European Central Bank and European Banking Authority (EBA). The final Basel III rules ("Basel III Endgame" in the US, "Basel 3.1" in the UK) are phasing in through the mid-2020s and raise RWA requirements for some banks.
Fintechs (Revolut, Chime, Nubank, Wise and similar) break some of these habits. Many are not full banks: they operate on a licence held by a partner bank, or an e-money licence that legally forbids them from lending customer deposits. For those, NIM is meaningless; look instead at revenue per active customer and interchange (the fee merchants pay on card transactions).
Where a fintech *does* hold a full banking licence (Nubank, Revolut in some markets), the same NIM, ROTE and CET1 maths apply. Nubank, for instance, reports real banking metrics because it is a real bank in Brazil and Mexico.
Knowledge check
1. Why does the Net Interest Margin formula use 'average earning assets' rather than total assets in the denominator?
2. A bank reports strong total profits but a very thin net interest margin. What does this most likely indicate about how it makes money?
3. The lesson stresses reading 'three lines' and reaching for a calculator rather than the full 400-page report. What is the underlying professional principle?
4. Select ALL correct answers about how a bank generates income according to the lesson.
Select all the correct answers.
5. Select ALL correct answers that correctly distinguish 'assets' from 'earning assets'.
Select all the correct answers.
Numbers can be arranged to flatter. Run these checks before trusting any bank or fintech's headline figures.
Strip out gains from asset sales, legal settlements, and tax quirks. Ask: would this ROTE repeat next year? A 15% ROTE inflated by a one-time property sale is not a 15% business.
Check the NPL ratio (non-performing loans: loans where the borrower has stopped paying, as a percentage of total loans) and the coverage ratio (provisions set aside against those bad loans). Rising NPLs with flat provisions is a classic warning sign. Euro area NPL ratios have been low recently, around 2% (estimate), but averages hide concentration.
Deposits are sticky and cheap; wholesale market funding can vanish in a crisis. The 2023 collapse of Silicon Valley Bank was a funding-and-duration failure: concentrated, uninsured deposits fled in hours. Check the deposit mix and how much is insured (under $250,000 FDIC cover in the US, €100,000 deposit guarantee in the EU).
Two banks can both show 14% CET1 but one uses aggressive internal models to shrink its RWAs. Compare the leverage ratio (capital against total unweighted assets) as a sanity check: it ignores risk-weighting entirely.
Read the licence. Where are deposits actually held? Who bears credit risk? A "neobank" running on a partner's licence has different risks (and protections) than a chartered bank.
Late filings, auditor changes, and restated results are red flags. For US banks, cross-check against FDIC and Fed call reports; for EU banks, the EBA risk dashboard publishes comparable data.