Pre-Provision Operating Profit — PPOP

What Is Pre-Provision Operating Profit — PPOP?

Pre-provision operating profit (PPOP) is the amount of income a bank or comparable type of financial institution procures in a given time span, before considering funds set to the side to accommodate future terrible debts. A bank will reduce the PPOP once it deducts the dollar amount it decides must be set to the side to cover expected loan defaults and other uncollectible debts.

The PPOP gives a reasonable estimate regarding what the bank hopes to have left for operating profit after it in the end causes cash outflows due to defaults on loans.

Grasping Pre-Provision Operating Profit — PPOP

Since most banks regularly have a large portfolio of loans outstanding to various customers at any one time, it is intelligent that some will default. Thusly, it would be erroneous for the bank to consider its whole operating profit as income that it will actually want to keep. Due to this, banks ordinarily report their operating income as a PPOP, to give investors knowledge into their operating profit, with the comprehension that it may as yet cause terrible debts, which would reduce its bottom line.

The amount PPOP clearly goes down after funds are reserved to cover potential bad debt. However, this isn't viewed as a cash outflow for the bank. The amount that a bank deducts depends on its loan default experience.

Pre-provision operating profit is at times alluded to pre-provision net revenue, however this figure accounts for different expenses as well as loss provisions.

Pre-Provision Operating Profit and Default Rates

Delinquency rates on individual consumer loans have changed altogether in the past three decades. The highest was a spike encompassing the outcome of the 2008 financial crisis and Great Recession, where this figure approached 5% in 2010. It has progressively dropped since, hitting a trough in 2015 just under 2%; as of Q4 2019, it remained at 2.34%, as per the Federal Reserve Bank of St. Louis. As a rule, the decade since the criss has been a strong period for the consumer credit market overall. More customers took part, with manageable levels of delinquency.

A few worries encompass the slight uptick in the number of credit card and car loan delinquencies, alongside rising interest rates and vulnerability in the political domain in regards to new regulations. By and large, however, this is a decent sign for banks — they don't appear to have to not eliminate huge funds from their pre-provision operating profit computations.

Other Profitability Measures

Pre-provision operating profit is just one measure of profits — one that is pretty specific to the banking industry. However, in business, many forms of depicting profitability exist, and Other ways incorporate these kind of ratios:

• Gross margin (Gross Profit/Net Sales * 100)
• Operating margin (Operating Profit/Net Sales * 100)
• Return on Assets (ROA (Net Income/Assets * 100)
• Return on Equity (ROE) (Net Income/Shareholders Equity * 100)

Analysts may apply some or all of the above profitability ratios all the more generously across companies.

Features

• Pre-provision operating profit (PPOP) is the amount of income that a financial institution, normally a bank, procures in a given time span before deducting funds set to the side to accommodate future terrible debts.
• Banks normally report their operating income as a PPOP, to give investors understanding into their operating profit — and the practical assumption, in view of past experience, that it will lose money on loan defaults and other uncollectible debts.