Trend and Ratio analysis of national banking sectors – a European experience

1. Trend and Ratio analysis of national banking sectors – a European experience Michael Olsen St. Petersburg, 8-9 June 2006 The views expressed are mine and do not necessarily represent those of the European Central Bank.

2. Outline • Basis for presentation • Trend analysis • Ratio analysis • Concluding remarks

3. Basis for presentation • A book in English and in Russian • Available in electronic format on the websites of the European Central Bank http://www.ecb.int/press/pr/date/2005/html/pr051013.en.htmland the Bank of Russia

4. Trend analysis • What are European banking supervisors looking at: • Trends in quantitative issues such as • Capital adequacy (composition and quality of capital, adequacy, access to capital, repayment of capital) • Liquidity (liquid assets, access to market, the liquidity plan) • Asset quality (composition, concentration, provisioning) • Liability (composition, concentration) • Earnings (profitability, earning performance, the profit plan and budget) • Risk concentration (key products and markets, credit and market risk (etc.) and risk positions)

5. Trend analysis • What are European banking supervisors looking at: • Trends in and the strength of qualitative issues such as • Management (fit and proper nature, board composition, cultural attitude, corporate planning and strategy) • Internal control system (decision-making process, risk management framework, limits and standards, IT, reporting, staff policy, segregation of responsibilities, money laundering controls)

6. Trend analysis • What are European banking supervisors looking at: • Three lines of defense: • Good management and sufficient profitability to absorb losses; • Proper provisioning practices that set aside reserves to cover expected losses; and • Adequate capital and equity reserves to cover unexpected losses.

7. Ratio analysis • Ratios used to assess performance related issues • Profitability (ROE, ROA, net interest margin, operating income/total assets) • Efficiency (cost-to-income ration, cost-to-assets ratio, staff costs to total income) • Income breakdown (interest income to total income, fee income to total income, trading income to total income, non-interest income to total income) • Margins (net interest margin, fee income margin, trading margin, income margin, operating cost margin, operating result margin, risk provision margin, pre-tax profit margin)

8. Ratio analysis • Ratios used to assess risks, buffers and structure • Credit risk (risk provisions to total customer loans, risk provisions to risk-weighted assets, risk provisions to net interest income, non-performing loans to customer loans, coverage, risk-weighted assets to total assets) • Capital (tier 1 ratio, total capital ratio, equity ratio) • Balance sheet structure (customer loans to total loans, interest-earning assets to total assets, trading assets to total assets, deposits to total assets, loan deposit ratio, interbank ratio, liquidity ratio)

9. Ratio analysis • Ratios used for assessment of growth • Change in customer loans • Change in customer deposits • Change in total assets • Change in pre-provision operating profit • Change in pre-tax profit • Change in net profit

10. Concluding remarks • Is trend and ratio analysis useful? • For banking supervisors • For the banking sector Thank you for your attention!