Positive jaws: What are they?
With earnings season in the banking sector 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 has been used, for example, by BBVA CEO Onur Genç during the quarterly results presentations.
What did he mean by 'positive jaws'?
Jaws, also known as Jaws ratio, compare income (a banking institution’s gross income or core revenues) 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. 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 in the euro zone, it becomes harder for banks to generate revenues. How can these positive jaws be achieved? Basically, through cost-containment efforts.