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Chapter. 5. Measuring and Evaluating Bank Performance. The purpose of this chapter is to discover what analytical tools can be applied to a bank’s financial statements so that management and the public can identify the most critical problems inside each bank

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Chapter

Chapter

5

Measuring and Evaluating Bank Performance

The purpose of this chapter is to discover what analytical tools can

be applied to a bank’s financial statements so that management and

the public can identify the most critical problems inside each bank

and develop ways to deal with those problems.


Value of the bank s stock

Value of the Bank’s Stock


Value of a bank s stock rises when

Value of a Bank’s Stock Rises When:

  • Expected Dividends Increase

  • Risk of the Bank Falls

  • Combination of Expected Dividend Increase and Risk Decline


Value of bank s stock if earnings growth is constant

Value of Bank’s Stock if Earnings Growth is Constant


Key profitability ratios in banking

Key Profitability Ratios in Banking


Key profitability ratios in banking cont

Key Profitability Ratios in Banking (cont.)


Breaking down roe

Breaking Down ROE

x

x


Roe depends on

ROE Depends On:

  • Equity Multiplier

    • Leverage or Financing Policies

  • Net Profit Margin

    • Effectiveness of Expense Management

  • Asset Utilization

    • Portfolio Management Policies


Components of roe for all insured banks

Components of ROE for All Insured Banks


Bank risks

Bank Risks

  • Credit Risk

  • Liquidity Risk

  • Market Risk

  • Interest Rate Risk

  • Earnings Risk

  • Solvency Risk


Credit risk

Credit Risk

The Probability that Some of the Bank’s Assets Will Decline in Value and Perhaps Become Worthless


Credit risk measures

Credit Risk Measures

  • Nonperforming Loans/Total Loans

  • Net Charge-Offs/Total Loans

  • Provision for Loan Losses/Total Loans

  • Provision for Loan Losses/Equity Capital

  • Allowance for Loan Losses/Total Loans

  • Allowance for Loan Losses/Equity Capital

  • Total Loans/Total Deposits


Liquidity risk

Liquidity Risk

Probability the Bank Will Not Have Sufficient Cash and Borrowing Capacity to Meet Deposit Withdrawals and Other Cash Needs


Liquidity risk measures

Liquidity Risk Measures

  • Purchased Funds/Total Assets

  • Net Loans/Total Assets

  • Cash and Due from Banks/Total Assets

  • Cash and Government Securities/Total Assets


Market risk

Market Risk

Probability of the Market Value of the Bank’s Investment Portfolio Declining in Value Due to a Rise in Interest Rates


Market risk measures

Market Risk Measures

  • Book-Value of Assets/ Market Value of Assets

  • Book-Value of Equity/ Market Value of Equity

  • Book-Value of Bonds/Market Value of Bonds

  • Market Value of Preferred Stock and Common Stock


Interest rate risk

Interest Rate Risk

The Danger that Shifting Interest Rates May Adversely Affect a Bank’s Net Income, the Value of its Assets or Equity


Interest rate risk measures

Interest Rate Risk Measures

  • Interest Sensitive Assets/Interest Sensitive Liabilities

  • Uninsured Deposits/Total Deposits


Earnings risk

Earnings Risk

The Risk to the Bank’s Bottom Line – Its Net Income After All Expenses


Earnings risk measures

Earnings Risk Measures

  • Standard Deviation of Net Income

  • Standard Deviation of ROE

  • Standard Deviation of ROA


Solvency or default risk

Solvency or Default Risk

Probability of the Value of the Bank’s Assets Declining Below the Level of its Total Liabilities. The Probability of the Bank’s Long Run Survival


Solvency risk measures

Solvency Risk Measures

  • Spread Between Bank CDs and Treasury Securities of the Same Maturity

  • Stock Price/Earnings Per Share

  • Equity Capital/Total Assets

  • Purchased Funds/Total Liabilities

  • Equity Capital/Risk Assets


Other forms of risk in banking

Other Forms of Risk in Banking

  • Inflation Risk

  • Currency or Exchange Rate Risk

  • Political Risk

  • Crime Risk


Performance measures related to bank size

Performance Measures Related to Bank Size


Chapter

UBPR

The Uniform Bank Performance Report Provided by U.S. Federal Regulators so that Analysts Can Compare the Performance of One Bank Against Another


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