Pre-Provision Operating Profit (PPOP) Definition, Vs. Net Revenue

By

Updated July 28, 2022

Reviewed by

What Is Pre-Provision Operating Profit—PPOP?

Pre-provision operating profit (PPOP) is the amount of income a bank or similar type of financial institution earns in a given time period, before taking into account funds set aside to provide for future bad debts. A bank will reduce th𓂃e PPOP once it deducts the dollar amount it dete♕rmines must be set aside to cover expected loan defaults and other uncollectible debts.

The PPOP provides a reasonable estimate as to what the bank expects to have left for 澳洲幸运5开奖号码历史查询:operating profit after it eventually incurs cash outflows due to 澳洲幸运5开奖号码历史查询:defaults on loans.

key takeaways

Pre-provision operating profit (PPOP) is the amount of income that a financial institution, usually a bank, earns in a given time period before subtracting funds set aside to provide for future bad debts.
Banks typically report their operating income as a PPOP, to give investors insight into their operating profit—and the realistic assumption, based on past experience, that it will lose money on loan defaults and other uncollectible debts.

Undeဣrstanding Pre-Provision Operat♏ing Profit—PPOP

Since most banks typically have a large 澳洲幸运5开奖号码历史查询:portfolio of loans outstanding to many different customers at any one time, it is logical that some will default. As such, it would be inaccurate for the bank to consider its entire operating profit as income that it will be able to keep. Due to this, banks typically report their 澳洲幸运5开奖号码历史查询:operating income as a PPOP, to give investors insight into their operating profit, with the understanding that it could still incur bad debts, which would reduce its 澳洲幸运5开奖号码历史查询:bottom line.

The amount PPOP obviously goes down after funds are earmarked to cover potential 澳洲幸运5开奖号码历史查询:bad debt. However, this is not considered a cash outflow for the bank. The amount that a bank deducts is bas𒁃ed on its loan default experience.

Important

Pre-provision operating profit is sometimes referred to pre-pro🐎vision net revenue, though this figure accounts for other expenses as well as los🍰s provisions.

Pre-Provis♌ion Operating Profit and Default Rates

Delinquency rates on individual consumer loans have fluctuated significantly in the past three decades. The highest was a spike surrounding the aftermath of the 2008 financial crisis and Great Recession, where this figure approached 5% in 2010. It has gradually dropped since, hitting a trough in 2015 just under 2%; as of Q1 2022, it was down to 1.63%, according to the Federal Reserve Bank of St. Louis. In general, the decade since the criss has been a🥃 strong period for the consumer credit market overall. More customers participated, with manageable levels of delinquency.

Some concerns surround the slight uptick in the number of credit card and auto loan delinquencies, along with rising interest rates and uncertainty in the political realm regarding new regulations. In general, though, this is a good sign for banks—they do not seem to need to not remove significant funds fro🌠m their pre-provision operating profit calculations.

Other Profitability Measures

Pre-provision operating profit is just on𒅌e measure of profits—one that is pretty specific to the banking industry. But in business, many forms of describing profitability exist, and Other ways include these sort of ratios:

澳洲幸运5开奖号码历史查询:Gross margin (Gross Profit/Net Sales * 100)
澳洲幸运5开奖号码历史查询:Operating margin (Operating Profit / Net Sales * 100)
澳洲幸运5开奖号码历史查询:Return on Assets (ROA (Net Income / Assets * 100)
澳洲幸运5开奖号码历史查询:Return on Equity (ROE) (Net Income/Shareholders Equity * 100)

Analysts may apply some or all of the above profitabi🦄lity ratios more liberal♌ly across companies.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

Federal Reserve Bank of St. Louis Economic Data. "."

澳洲幸运5开奖号码历史查询