Summary

In monitoring a bank’s earnings, directors should receive reports that allow them to compare actual results to budgeted projections and assess the quality, or sustainability, of earnings. Earnings quality refers to the composition, level, trend and stability of bank earnings. For directors and bank management, earnings quality is a financial report card. It tells how the bank has managed its risk exposure. Where risk management is good, earnings will be consistently strong and earnings quality will be good. Where risk management is poor, the opposite will be the result. In such cases, dissecting earnings into its component parts provides insights regarding areas needing attention.