Measuring Commercial Bank Profitability: Proceed With Caution

R. Alton Gilbert and David Wheelock

No 2007-WP-22, NFI Working Papers from Indiana State University, Scott College of Business, Networks Financial Institute

Abstract: The Federal tax code creates challenges for comparing the profit rates of different banks on a consistent basis. The earnings of banks that elect to operate under Subchapter S of the Federal tax code are not subject to the Federal corporate income tax, but S-bank shareholders are taxed on their pro rata share of the entire earnings of the bank. The number of banks electing Subchapter S tax treatment has increased rapidly, especially among small banks. Using estimates of the Federal corporate income tax that S-banks would pay if they were subject to the tax, this article shows that differences in the tax treatment of S-banks and other banks has a large impact on measures of U.S. banking system profitability. Further, the article shows that adjustment of S-bank earnings by estimates of Federal income taxes to make them comparable with the earnings of other banks can markedly affect conclusions of studies that use net income as a measure of performance. Finally, the article shows that S-banks tend to out-earn their peers even if S-bank earnings are reduced by estimated Federal taxes, and that S-banks also tend to have higher earnings rates than their peers in the year before they elect S-bank status.

Keywords: Subchapter S; return on assets; return on equity; bank earnings; corporate income tax (search for similar items in EconPapers)
JEL-codes: G21 G28 H25 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2007-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Journal Article: Measuring commercial bank profitability: proceed with caution (2007)
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