Now that the reporting season in the banking sector is underway, it may be the right time to take a look at some of the most commonly used, but more frequently misunderstood, financial terms. One of these terms is the expression “positive jaws,” which is used, for example, by BBVA CEO Carlos Torres Vila during the results presentations.
What was did he mean by “positive jaws?”
Jaws compare income (a banking institution’s gross income) and operating expenses growth trends. If gross income growth exceeds expense growth, then we talk about positive jaws.
Why is the term “jaws” used? This metaphor helps to graphically explain the process whereby, starting from the point at which the income and cost curves intersect, income growth exceeds expense growth, progressively. In this case, the wider the jaws, the better.
This progression also leads to an improvement in efficiency. In BBVA, this efficiency stood at 51.9% as of the end of 2016, an improvement of 51 basis points compared to the end of 2015. Here’s where positive jaws become more evident, i.e., that by spending less compared to the income obtained, the institution’s efficiency improves.
In the current context of limited profitability in the finance sector, especially as a result of low interest rates, it becomes harder for banks to generate revenues. How can these positive jaws be achieved? Basically, through cost-containment efforts.
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